UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

Commission File Number 1-7007

BANDAG, INCORPORATED
(Exact name of registrant as specified in its charter)


Iowa	42-0802143
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

2905 North Highway 61
Muscatine, Iowa 52761-5886
(Address of principal executive offices)

Registrant's telephone number, including area code:(563) 262-1400

Securities registered pursuant to Section 12(b) of the Act:


Common Stock - $1 Par Value	New York Stock Exchange and Chicago Stock Exchange
Class A Common Stock - $1 Par Value
Common Share Purchase Rights
Class A Common Share Purchase Rights
(Title of Class)	(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes |_| No |X|

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X|

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Act. (Check one):

Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|

Indicate by check mark whether the registrant is shell company (as defined in Rule 12b-2 of the Act). Yes |_| No |X|

The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of June 30, 2006: Common Stock, $236,952,659, Class A Common Stock (non-voting), $146,955,168, Class B Common Stock, $524,115.

The number of shares outstanding of the issuer’s classes of common stock as of January 31, 2007: Common Stock, 9,982,291 shares; Class A Common Stock, 9,520,791 shares.

Documents Incorporated by Reference:Portions of the Company’s Proxy Statement for the 2007 Annual Meeting of the Shareholders are incorporated herein by reference in Part III, unless the Proxy Statement will not be filed by April 30, in which case the Company will amend this Form 10-K to provide omitted information.

Bandag, Incorporated
Annual Report on Form 10-K
Year Ended December 31, 2006

Table of Contents

		Page
PART I		2
	Item 1. Business	2
	Item 1A. Risk Factors	10
	Item 1B. Unresolved Staff Comments	11
	Item 2. Properties	11
	Item 3. Legal Proceedings	12
	Item 4. Submission of Matters to a Vote of Security Holders	13
PART II		14
	Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
	Purchases of Equity Securities	14
	Item 6. Selected Financial Data	16
	Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations	17
	Item 7A. Quantitative and Qualitative Disclosures about Market Risk	30
	Item 8. Financial Statements and Supplementary Data	30
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	68
	Item 9A. Controls and Procedures	68
	Item 9B. Other Information	68
PART III		68
	Item 10. Directors, Executive Officers and Corporate Governance	68
	Item 11. Executive Compensation	68
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
	Stockholder Matters	69
	Item 13. Certain Relationships and Related Transactions, and Director Independence	69
	Item 14. Principal Accountant Fees and Services	69
PART IV		70
	Item 15. Exhibits and Financial Statement Schedules	70

BANDAG, INCORPORATED

FORWARD-LOOKING STATEMENTS

Statements contained in this Annual Report on Form 10-K and the accompanying 2006 Annual Report which are not historical facts may be forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors. In addition to the risk factors described in Item 1A of this Annual Report on Form 10-K, factors that could result in material variations include, but are not limited to:

unanticipated issues associated with obtaining approvals to complete the proposed merger with Bridgestone Americas Holding, Inc.;

other unanticipated issues associated with completion of the proposed merger;

changes in consumer demand and prices resulting in a negative impact on revenues and margins;

increased competition in our product lines;

raw material substitutions and increases in the cost of raw materials, utilities, labor and other supplies;

changes in capital availability or costs;

workforce factors such as labor interruptions;

cost of compliance with applicable governmental regulations and changes in such regulations, including environmental regulations; and

the general political, economic and competitive conditions in markets and countries where we and our subsidiaries operate, including currency fluctuations and other risks associated with operating in foreign countries.

These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation, and disclaim any obligation, to update information contained in this Annual Report on Form 10-K and the accompanying 2006 Annual Report, including these forward-looking statements, to reflect events or circumstances that occur after the date of the filing of this Annual Report on Form 10-K and the accompanying 2006 Annual Report.

MANAGEMENT CERTIFICATIONS

Bandag, Incorporated has filed as exhibits to this Annual Report on Form 10-K the certifications of its Chief Executive Officer and the Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act. Bandag, Incorporated has submitted to the New York Stock Exchange the Annual CEO Certification required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual.

PART I

Item 1. BUSINESS

Introduction

All references herein to the “Company” or “Bandag” refer to Bandag, Incorporated and its subsidiaries unless the context indicates otherwise.

The Company has three reportable business segments: the manufacture and sale of precured tread rubber, equipment and supplies for retreading tires (the Traditional Business), the sale and maintenance of new and retread tires to principally commercial and industrial customers through its wholly-owned subsidiary, Tire Distribution Systems, Inc. (TDS) and the providing through the Company’s subsidiaries Speedco, Inc. (Speedco) and Truck Lube 1 of quick-service truck lubrication, routine tire service and light truck maintenance through company-owned locations (Vehicle Services). Refer to Note 13, “Operating Segment and Geographic Area Information,” of the consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K for further details.

On December 5, 2006, Bandag entered into a definitive merger agreement with Bridgestone Americas Holding, Inc. (BSAH) and a subsidiary thereof pursuant to which BSAH will acquire the outstanding shares of each class of stock of Bandag for US $50.75 per share in cash. This proposed merger remains subject to the receipt of shareholder approval and other regulatory approvals, as well as the satisfaction of customary closing conditions. The transaction is expected to be completed in the second quarter of 2007.

As of December 31, 2006, the Company had three classes of capital stock outstanding. These three classes were Common Stock, Class A Common Stock and Class B Common Stock. On January 16, 2007, pursuant to the terms of the Company’s charter, all of the Class B Common Stock was automatically converted into Common Stock on a share-per-share basis. As of January 31, 2007, the Carver Family (identified below) beneficially owned shares of Common Stock constituting 36% of the votes entitled to be cast in the election of directors and other corporate matters. The Carver Family is composed of (i) Lucille A. Carver, a former director and widow of Roy J. Carver, (ii) the lineal descendants of Roy J. Carver and their spouses, and (iii) certain trusts and other entitles for the benefit of the Carver Family members.

On February 13, 2004, the Company acquired an 87.5% majority interest in Speedco from its founders and Equilon Enterprises, LLC, a Royal Dutch Shell Group company. On June 10, 2004, Speedco acquired the assets of six licensed locations, which were owned and operated by PM Express, Inc. On April 1, 2006, the Company acquired Truck Lube 1.

Traditional Business

(a) General

The Traditional Business is engaged primarily in the production and sale of precured tread rubber and equipment used by its franchisees for the retreading of tires primarily for trucks, but also for buses, light commercial trucks, industrial equipment, off-the-road equipment and passenger cars. Bandag specializes in a proprietary cold-bonding retreading process which it introduced to the United States in 1957 (the Bandag Method). The Bandag Method separates the process of vulcanizing the tread rubber from the process of bonding the tread rubber to the tire casing, allowing for optimization of temperature and pressure levels at each stage of the retreading process.

The Company and its licensees have 844 franchisees worldwide, with 36% located in the United States and 64% internationally. The majority of Bandag’s franchisees are independent operators of full service tire distributorships. The remaining franchises are owned by either GCR, a Bridgestone Corporation wholly-owned company, or by Bandag’s distribution company, TDS. The Traditional Business’ revenues primarily come from the sale of retread material and equipment to its franchisees. The Traditional Business’ products compete in the replacement tire market with new tire sales, as well as retreads produced using the cold-bonding method and other retread processes. The Company concentrates its marketing efforts on existing franchisees and on expanding their respective market penetrations. Due to its strong distribution system, marketing efforts and leading technology, Bandag, through its independent franchise network and TDS, has been able to maintain the largest market presence in the retreading industry.

The Traditional Business in the United States competes primarily in the medium and wide base commercial truck tire replacement market. Medium and wide base truck tires are designed for medium trucks Classes 4 through 6, heavy trucks Classes 7 and 8, as well as trailers and commercial chassis. Both new tire manufacturers and tread rubber suppliers compete in this market. While the Company has franchisees in 86 countries, and competes in all of these geographic markets, its largest market is the United States. Truck tires retreaded by the Company’s franchisees make up approximately 22% of the United States medium and wide base commercial tire replacement market. Other companies which supply to trucking fleets in the replacement tire market include large new tire manufacturers such as The Goodyear Tire & Rubber Company (Goodyear), Bridgestone Corporation (Bridgestone) and Groupe Michelin (Michelin). Goodyear, Michelin and Cooper Tire and Rubber Company also compete in the United States market as well as in other markets as a tread rubber supplier to a combination of company-owned and independent retreaders.

The Traditional Business consists of the franchising of a proprietary process for the retreading of tires primarily for trucks, buses, light commercial trucks, and the production and sale of precured tread rubber and related products and equipment used in connection with this process.

The Traditional Business can be divided into two main areas: (i) manufacturing the tread rubber and (ii) providing and supporting the retreading system to bond the tread rubber to the tire casing. Bandag manufactures over 500 separate tread designs and sizes, treads specifically designed for various applications, allowing fleet managers to fine-tune their tire programs. Bandag tread rubber is vulcanized prior to shipment to its franchisees. The Bandag franchisee prepares the tire casing for retreading and performs the retreading process of bonding the cured tread to the prepared tire casing. This two-step process allows utilization of the optimum temperature and pressure levels at each step. Using optimum temperature levels during the bonding process results in a consistent, higher quality finished retread with less damage to the casing. Bandag has developed a totally integrated retreading system with the materials, bonding process and manufacturing equipment specifically designed to work together as a whole.

(b) Markets and Distribution

The principal market categories for the Traditional Business are medium and wide base commercial truck tires, with more than 90% of the tread rubber sold by the Company used in the retreading of these tires. Additionally, the Company markets tread rubber for the retreading of passenger, light truck, heavy truck, off-the-road equipment, and industrial tires; however, historically, sales of tread rubber for these applications have not contributed materially to the Company’s results of operations.

Trucks and Buses. Tread rubber, equipment, and supplies for retreading and repairing truck and bus tires are sold by the Company primarily to independent franchisees and TDS which use the Bandag Method for that purpose.

National Account Business. The Company has entered into contracts with companies pursuant to which Bandag agrees to sell retread tires directly to transportation fleets of such companies and provide maintenance and service for the retread tires (the National Accounts). Bandag subcontracts the sales, maintenance, and service components of the National Accounts to its independent franchisees and to TDS.

Other Applications. The Company continues to manufacture and supply to its franchisees and other dealers a limited amount of tread rubber for off-the-road tires, industrial tires, including solid and pneumatic, passenger car tires and light commercial tires for light trucks and recreational vehicles.

Franchises. Bandag has 844 franchises throughout North America, Central America, South America, Europe, Africa, Asia, Australia and New Zealand. These franchises are owned and operated by franchisees, some with multiple franchises and/or locations. Of these franchises, 307 are located in the United States. Thirty-three of Bandag’s foreign franchises are franchised by a licensee of the Company in Australia and 34 are franchised by a licensee in South Africa. The Company also has a joint venture in Sri Lanka.

The current franchise agreement offered by the Company grants the franchisee the non-exclusive retread manufacturing rights to use the Bandag Method for one or more applications and the Bandag trademarks in connection therewith within a specified territory, but the franchisee is free to market Bandag retreads outside the territory.

The Company faces strong competition in the market for replacement truck tires, the principal retreading market which it serves. The competition comes not only from the major manufacturers of new tires, including less expensive tires from Asia, but also from manufacturers of retreading materials. Competitors include producers of “camelback,” “strip stock,” and “slab stock” for “hot-cap” retreading, as well as a number of producers of precured tread rubber. Various methods for bonding precured tread rubber to tire casings are used by competitors.

Bandag retreads often command a higher price than tires retreaded by the competitors’ systems. The Company believes that the superior quality and greater performance of Bandag retreads and expanded service programs to end-users validate this price differential.

Bandag franchisees compete with many other new-tire dealers and retreading operators of varying sizes. These include retreading shops operated by the major new-tire manufacturers, large independent retread companies, and smaller commercial tire dealers.

The Company’s franchise agreements with its independent franchisees typically terminate after five years unless extended by mutual consent for an additional five years. In most cases the agreements are extended. In addition, independent franchisees have the option of terminating the agreements after three years. Since Michelin entered the United States retread market in 1997, the Company has experienced increasing competition in the United States retread market. Although Michelin is substantially larger than the Company and has greater resources, the Company believes that it can effectively compete with Michelin and maintain the stability of its United States franchise organization.

For additional information on competition faced by the Traditional Business see the foregoing discussion under “General” herein.

(d) Sources of Supply

The Company manufactures the precured tread rubber, cushion gum, and related supplies in Company-owned manufacturing plants in the United States, Brazil, Belgium and Mexico. The Company also participates in a joint venture agreement in Sri Lanka as well as licensing agreements in South Africa and Australia. The Company also manufactures pressure chambers, tire casing analyzers, buffers, tire builders, tire-handling systems, and other items of equipment used in the Bandag Method. Curing rims, chucks, spreaders, rollers, certain miscellaneous equipment, and various retreading supplies, sold by the Company, are purchased from others.

The Company purchases rubber and other materials for the production of tread rubber and other rubber products from a number of suppliers. The rubber for tread is primarily synthetic and obtained principally from sources which most conveniently serve the respective areas in which the Company’s plants are located. Although synthetic rubber and other petrochemical products have periodically been in short supply and significant cost fluctuations have been experienced in previous years, including significant price increases throughout 2006, the Company has not experienced any significant difficulty in obtaining an adequate supply of such materials. Synthetic prices historically have been related to the cost of petrochemical feedstocks and natural gas used in processing. However, the effect on operations of future shortages will depend upon their duration and severity and cannot presently be forecasted.

The principal source of natural rubber, used for the Company’s cushion gum, is Asia. The supply of natural rubber has historically been adequate for the Company’s purposes. Natural rubber is a commodity subject to wide price fluctuations as a result of the forces of supply and demand.

(e) Patents

The Company owns or has licenses for the use of a number of United States and international patents covering various elements of the Bandag Method. The Company has patents covering improved features, some of which will not expire until 2019. The Company has applications pending for additional patents.

The Company does not consider that patent protection is the primary factor in its successful retreading operation, but rather that its proprietary technical “know-how,” product quality, franchisee support programs and effective marketing programs are more important to its success.

The Company has secured registrations for its trademark and service mark BANDAG, as well as other trademarks and service marks, in the United States and most of the other important commercial countries.

TDS

(a) General

TDS, which provides new and retread tire products and tire management services to national, regional and local fleet transportation companies, operates 12 Bandag franchise and manufacturing locations and 46 commercial and retail outlets in 8 states. During 2006, TDS opened 1 new commercial and retail location and closed 3 retread plant locations. During 2005, TDS closed 1 commercial and retail outlet, and acquired 1 retread plant and 5 commercial and retail outlets. In 2004, TDS sold or closed 6 retread plants and 15 commercial and retail outlets and acquired 2 retread plants and 7 commercial and retail outlets.

(b) Markets and Distribution

TDS offers complete tire management services including: the complete line of Bandag retreads, new tires (commercial, retail and off-the-road), alignment and 24-hour road service. The tire management services are provided over a broad geographic area west of the Mississippi in the United States. This geographic coverage allows TDS to provide consistent, cost-effective programs, information, products, and services to local, regional and national fleets.

The Company believes that cost effective tire management service continues to grow in importance for fleets of all sizes. Trucking fleets are under intense pressure to be cost competitive and reliable in their services. Tire related costs are one of the top operating expenses for trucking fleets. Bandag and its dealer alliance network (including TDS) are able to provide trucking companies with comprehensive tire management services, which result in lower tire operating costs for the trucking company while, at the same time, helping the trucking company increase its service reliability through the same tire management programs.

In an effort to fully service its customers, TDS sells new truck tires manufactured primarily by Bridgestone/Firestone, Continental/General and Yokohama, and to a lesser extent, other tire manufacturers.

TDS markets its products through sales personnel located at each of its commercial locations, retread production facilities and retail facilities. TDS commercial locations operate as points of sale for retread tires, new tires and services. In addition, the commercial locations operate as a home base for mobile service trucks which must be able to provide customers with reliable and timely emergency service as well as regularly scheduled maintenance service. TDS’ sales personnel make personal sales calls on existing customers to ensure satisfaction and loyalty.

TDS competitors are other tire dealers which offer competing retread applications, as well as Bandag franchised dealers. In addition, such tire dealers typically sell and service new tires produced by large new tire manufacturers and service providers such as those that supply TDS, as well as Goodyear and Michelin. Goodyear and Michelin also compete in the United States market as tread rubber suppliers through a combination of company-owned and independent retreaders.

(d) Sources of Supply

TDS purchases precured tread rubber and retreading equipment and supplies from Bandag and purchases new tires from new tire companies including Bridgestone/Firestone, Yokohama, Continental/General, and other manufacturers.

Vehicle Services

(a) General

On February 13, 2004, the Company acquired an 87.5% majority interest in Speedco, Inc. from its founders and Equilon Enterprises, LLC, a Royal Dutch Shell Group company. On June 10, 2004, Speedco, Inc. acquired the assets of six licensed locations, which were owned and operated by PM Express, Inc. Speedco provides quick-service truck lubrication and routine tire service and has 47 company-owned on-highway locations in the United States. On April 1, 2006, the Company acquired Truck Lube 1, which provides light truck maintenance.

(b) Markets and Distribution

Speedco markets its product/service through its on-highway truck service facility with a nationwide network. The multiple product/service options can be purchased independently or in combination. These include oil change and lubrication service, and tire repair, replacement, and maintenance service. Both services are built on fast turn-around time, high-quality products and professional services to owner operators and local, regional and national fleets.

Speedco’s market positioning is premium product and premium price. The primary product/service benefit to the customer is to avoid unscheduled repair and downtime. Customers use this service to maintain the integrity of their tractor and trailer vehicle and for tire preventative maintenance.

Speedco tire customers are divided into two types: Speedco Direct and Manufacturer National Accounts. Speedco Direct customers purchase tire product and services per the Manufacturer’s Suggested Retail Price established by Speedco. For new tire Manufacturer National Account customers, the tire manufacturer sets the pricing for the new tire and Speedco earns a delivery commission.

Truck Lube 1’s locations for providing light truck maintenance are in Florida.

Speedco is the only national on-highway network specializing in quick lubes and tire service for heavy-duty trucks. Speedco competitors in the quick lube and tire business are truck stop chains and other tire dealers, including Pilot, Petro, Flying J and Travel Centers of America. Speedco’s tire competitors are other tire dealers that typically sell and service new and retread tires.

(d) Sources of Supply

Speedco purchases oils from Shell Oil, Exxon Mobil, and Chevron and filters from Baldwin, CAT and Fleetguard. Speedco purchases new tires direct from new tire companies including Goodyear, Michelin and Yokohama. Bandag retreads are purchased from Bandag franchised dealers.

Regulations

The Transportation Recall Enhancement Accountability and Documentation Act (TREAD Act), including the rules adopted thereunder, applies to tire manufacturers, importers of tires and, with respect to certain provisions, to retread tire manufacturers. The National Highway Transportation Safety Administration, the federal agency that oversees certain aspects of the tire industry, has proposed and may propose additional rules under the TREAD Act that may affect retread tire manufacturers. There are numerous other federal and state safety and other regulations for motor vehicles and components, including tires and wheels. The Company believes it is in compliance in all material respects with the regulations applicable to its business.

Other Information

The Company conducts research and development of new products, primarily in the Traditional Business, and the improvement of materials, equipment, and retreading processes. The cost of this research and development program was approximately $6,737,000 in 2006, $7,353,000 in 2005 and $7,063,000 in 2004.

The Company’s business has seasonal characteristics, which are tied not only to the overall performance of the economy but, more specifically, to the level of activity in the trucking industry. Tire demand does, however, lag the seasonality of the trucking industry.

The Company has sought to comply with all statutory and administrative requirements concerning environmental quality. The Company has made and will continue to make necessary capital expenditures for environmental protection. It is not anticipated that such expenditures will materially affect the Company’s earnings or competitive position.

As of December 31, 2006, the Company had an estimated 3,362 employees.

Operating Segment and Geographic Area Information

Information concerning operating segment and geographic area information is incorporated by reference to Note 13 “Operating Segment and Geographic Area Information,” of the consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K.

Executive Officers of the Registrant

The following table sets forth the names and ages of all executive officers of the Company as of January 31, 2007, the period of service of each with the Company, positions and offices with the Company presently held by each, and the period during which each officer has served in his/her present office:

Name		Period of Service with Company	Present Position or Office	Period in Present Office
Martin G. Carver*	58	27 Years	Chairman of the Board, Chief Executive Officer and President	25 Years
David W. Dahms	47	17 Years	Vice President and Treasurer	10 Months
Warren W. Heidbreder	60	24 Years	Vice President, Chief Financial Officer and Secretary	10 Years
Frederico U. Kopittke	63	12 Years	Vice President, International	5 Years
John C. McErlane	53	21 Years	Vice President, North America	9 Months
Jeffrey C. Pattison	51	21 Years	Vice President, Corporate Controller and Assistant Secretary	10 Months
Michael A. Tirona	57	21 Years	Vice President and General Manager - Europe	5 Years
Mark A. Winkler	49	16 Years	Vice President, Vehicle Services	10 Months

* Denotes that officer is also a director of the Company.

Mr. Martin G. Carver was elected Chairman of the Board effective June 23, 1981, Chief Executive Officer effective May 18, 1982, and President effective May 25, 1983. Prior to his present position, Mr. Carver was also Vice Chairman of the Board from January 5, 1981 to June 23, 1981.

Mr. Dahms joined Bandag in 1989. From 1989 through 1997, he held several positions with the Company. In March of 1997 he was promoted to Credit Manager of North American Sales. In January 1999 he was promoted to Manager, Corporate Credit and held that position until January 2004, when he was promoted to Director, Treasury Services. In March 2004 he was elected to the position of Director, Treasury Services and Treasurer and served in that position until April 2006, when he was elected Vice President and Treasurer.

Mr. Heidbreder joined Bandag in 1982. In 1986 he was elected to the office of Vice President, Legal and Tax Administration, and Secretary. In November 1996, he was elected to his current office of Vice President, Chief Financial Officer, and Secretary effective as of January 1, 1997.

Mr. Kopittke joined Bandag in July 1994 as Company Manager of Bandag do Brasil Ltda. He served in that position until March 1998 when he was elected to the office of Vice President, Latin America. He served in that position until July 1998 when he was elected to the office of Vice President Latin America and South Africa. In February 2001, he was elected to his current office of Vice President, International, effective March 1, 2001.

Mr. McErlane joined Bandag in 1985. From 1985 through 1995, he held several managerial positions with the Company. In 1996, he was promoted to the position of Director, Marketing. In January 1997, he was appointed to the office of Vice President, Marketing. In February 1998, he was elected to the office of Vice President, Marketing and Sales. In September 2001 he was elected to the offices of Vice President, Bandag, Incorporated and President, Tire Distribution Systems, Inc. and served in that position until May 2006, when he was elected to his current office of Vice President, North America.

Mr. Pattison joined Bandag in 1986. From 1986 through 1999, he held several positions with the Company. In 1999, he was promoted to Director, Treasury Services and Assistant Treasurer and served in that position until August 2002, when he was elected to the office of Vice President and Treasurer. In January 2004, Mr. Pattison assumed the responsibilities of Vice President, People Services. Mr. Pattison was elected to the office of Vice President and Corporate Controller on August 5, 2005 and served in that position until April 2006, when he was elected to his current position of Vice President, Corporate Controller and Assistant Secretary.

Mr. Tirona joined Bandag in 1985. From 1985 through 1995, he held several positions with the Company. In 1995, he was promoted to General Manager, P.T. Bandag Indonesia. In 1997, he was promoted to Vice President, Tire Management Solutions, Inc. and served in that position until September 2001, when he was promoted to Vice President and General Manager – Europe. He was elected to his current office of Vice President and General Manager – Europe on November 13, 2001.

Mr. Winkler joined Bandag in 1991. From 1991 through 1996, he held several positions with the Company. In June 1996 he was promoted to Sales Manager, EHRD and held that position until August 1998, when he was promoted to Marketing Director. In April 2006 he was elected to his current position of Vice President, Vehicle Services.

Under severance agreements, entered into in 1999, certain of the executive officers (Martin G. Carver, Warren W. Heidbreder and John C. McErlane) are entitled to receive severance benefits equal to the greater of a specified dollar amount or an amount equal to 24 months base salary if their employment is involuntary terminated or they voluntarily terminate their employment for good reason, except for death, disability or retirement. For purposes of these severance agreements, “good reason” means (1) a 15% or greater reduction in the executive’s base pay, (2) a materially adverse change, without the executive’s prior written consent, in the nature or scope of the executive’s title or responsibilities, or (3) the relocation of the executive’s principal place of employment by more than fifty (50) miles. The severance agreements restrict the executive officers from competing with Bandag for twenty-four months following the termination of employment and also contain extensive restrictions on disclosure of Bandag confidential information. In connection with entering into the consulting agreements discussed below, the employment of Martin G. Carver and Warren W. Heidbreder will be terminated as of the effective date of the merger, thereby triggering the obligation to make severance payments to them under these agreements.

Certain other executive officers (Mark A. Winkler, David W. Dahms, Frederico U. Kopittke and Jeffrey C. Pattison) are parties to severance agreements entered into in connection with the merger agreement that provide for a severance payment of one year’s base salary (two year’s base salary for Mr. Kopittke) in the event that, within one year following a change of control of the Company, the executive officer is terminated without “cause” or the executive officer terminates his or her employment for “good reason” (namely, a reduction in salary and benefits to amounts which are not substantially the same as those in effect as of the date of the agreement or the relocation of the officer’s principal place of employment to a location more than 50 miles from such person’s principal place of employment as of the date of the agreement).

Each of Martin G. Carver, Chairman of the Board, President and Chief Executive Officer, and Warren W. Heidbreder, Vice President, Chief Financial Officer and Secretary, whose employment with Bandag will terminate as of the effective date of the merger, entered into a consulting agreement, to be effective as of the effective date of the merger, pursuant to which Messrs. Carver and Heidbreder will provide certain consulting and other related services to the Company in accordance with the terms and conditions contained therein, if requested by the Company (Bandag is not required to request any such services).

All of the above-named executive officers have been elected by the Board of Directors and serve at the pleasure of the Board of Directors.

Available Information

The Company maintains a website at http://www.bandag.com. The Company makes available on the website, free of charge, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as is reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. In addition, (i) the Company’s Global Ethics Policy, (ii) its Code of Ethics for the Chief Executive Officer and the Senior Financial and Accounting Officers, (iii) charters for the Audit, Nominating and Corporate Governance and the Management Continuity and Compensation Committees of the Company’s Board of Directors, and (iv) the Company’s corporate governance guidelines are available on the Company’s website and available in print upon written request directed to Warren Heidbreder, Secretary, 2905 N. Highway 61, Muscatine, IA 52761. The Company is not including the information contained on or available through its website as a part of, or incorporating such information into, this Annual Report on Form 10-K.

Item 1A. RISK FACTORS

You should carefully consider the risk factors described below in addition to the other information set forth or incorporated by reference in this 2006 Annual Report on Form 10-K. If any of the following risks actually occur, our financial condition or results of operations could be materially adversely affected. The following list of risk factors may not be exhaustive. Additional risks and uncertainties not presently known or that we currently believe to be immaterial may also adversely affect us.

We have entered into an agreement to be acquired and we cannot assure that the transaction will be completed.

On December 5, 2006, we entered into an agreement to be acquired by Bridgestone Americas Holding, Inc. Consummation of the transaction is subject to various conditions, including shareholder and regulatory approvals, that are beyond our control. In the event the transaction is not consummated, it could have a material adverse effect on the Company.

We face significant global competition and our market share could decline.

Retreaded tires are sold under highly competitive conditions throughout the world. We compete with other new and retread tire manufacturers on the basis of product design, performance, price, reputation, customer service, and consumer convenience. The relationship between new tire pricing and retread unit pricing has been narrowing, primarily due to retread unit prices increasing at a faster rate than new tires and lower-priced imported new tires entering the market. The narrowing of prices between new tires and retread tires reduces one of the competitive advantages of retread tires, thereby increasing competition. Our ability to compete successfully will depend, in significant part, on our ability to reduce costs. If we are unable to compete successfully, our market share may decline, materially adversely affecting our results of operations and financial condition.

We rely on the success and stability of our franchisees.

Our franchisees compete with many other new-tire dealers and retreading operators of varying sizes. If we are unable to maintain the stability of our franchise organization, our market share may decline, materially adversely affecting our results of operations and financial condition.

If we are unable to complete the merger with BSAH our business could be materially adversely affected.

If we are unable to complete the merger transaction BSAH may seek another opportunity in North America to enter the retread market, thereby materially adversely affecting our results of operations and financial condition.

Higher raw material costs may adversely affect our operating results and financial condition.

Raw material costs increased significantly in 2005 and 2006, driven by increases in costs of oil and natural rubber. Market conditions may prevent us from passing these increased costs on to our customers through timely price increases. As a result, higher raw material costs may result in declining margins and operating results.

Speedco expansion may adversely affect our operating results and financial condition.

We anticipate strengthening Speedco’s success by adding more locations and related tire capability. A major component of the expansion thus far has been to modify most of the existing locations and build new locations to include a Bandag designed and developed high-speed tire sales and service capability. As a result, the increased costs associated with the Speedco expansion resulted in declining margins and operating results in 2006 and may continue to result in declining margins and operating results in 2007.

Our international operations have certain risks that may materially adversely affect our operating results.

We have franchisees in Central America, South America, Europe, Africa and Asia and licensees in Australia and South Africa. These international operations are subject to certain inherent risks, including: exposure to local economic conditions, potential adverse changes in the diplomatic relations of foreign countries with the United States, adverse currency exchange controls, withholding taxes and the withdrawal of foreign investments and earnings, the potential instability of foreign governments, export and import restrictions, and other changes in laws or government policies. The likelihood of such occurrences and their potential impact on us vary from country to country and are unpredictable.

We have foreign currency translation and transaction risks that may adversely affect our operating results.

The financial condition and results of operation of certain of our operating entities are reported in various foreign currencies and then translated into U.S. dollars at the applicable exchange rate for inclusion in our financial statements. As a result, the appreciation of the U.S. dollar against these foreign currencies has a negative impact on our reported sales and operating margin (and conversely, the depreciation of the U.S. dollar against these foreign currencies has a positive impact). The volatility of currency exchange rates may materially adversely affect our operating results.

If we are unable to attract and retain key personnel our business could be materially adversely affected.

Our business substantially depends on the continued service of key members of our management, particularly Martin G. Carver, our chief executive officer. The loss of Mr. Carver or the services of a significant number of our management could have a material adverse effect on our business. Our continued success is also dependent upon our ability to attract and retain qualified personnel. Competition for these employees is intense, and we could experience difficulty from time to time in hiring and retaining the personnel necessary to support our business. If we do not succeed in retaining our current employees and attracting new high quality employees, our business could be materially adversely affected.

Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 2. PROPERTIES

Traditional Business

The general offices of the Company are located in a Company-owned 56,000 square foot office building in Muscatine, Iowa.

The tread rubber manufacturing plants of the Company are located to service principal markets. The Company owns nine plants. However, the Company only operates seven of these plants, three of which are located in the United States, and the remainder in Belgium, Brazil (two plants) and Mexico. The plants vary in size up to 194,000 square feet with the first plant being placed into production in 1959. All of the plants are owned in fee. Operations in one tread rubber manufacturing plant located in Canada were suspended in the second quarter of 2006 and that facility is being prepared for sale. Operations in one tread rubber manufacturing plant located in the United States were suspended in the fourth quarter of 1999 but the facility remains viable for general corporate purposes.

Retreading equipment is manufactured at Company-owned plants located in Muscatine, Iowa and Campinas, S.P., Brazil, of approximately 60,000 square feet and 10,000 square feet, respectively.

In addition, in Muscatine the Company owns a research and development center of approximately 58,400 square feet and an 83,000 square foot training and conference center. Similar training facilities are located in Brazil and Europe. The Company owns a 26,000 square foot office facility in Muscatine which is being prepared for sale. The Company also owns a 26,000 square foot office and machining facility in Muscatine.

Also, the Company mixes rubber and produces cushion gum and envelopes at a Company-owned 168,000 square foot plant in Long Beach, California. The Company owns its European headquarters facility in Brussels, Belgium and a 129,000 square foot warehouse in Born, Netherlands.

In the opinion of the Company, all of its Traditional Business properties are maintained in good operating condition and the production capacity of their plants is adequate for the near future. Because of the nature of the activities conducted, necessary additions can be made within a reasonable period of time.

TDS

TDS currently owns 8 and leases 50 facilities. Twelve (12) contain space for TDS retread production and 46 contain space for commercial and retail operations. The Company believes that it will be able to renew its existing leases as they expire or find suitable alternative locations. The leases generally provide for a base rental, as well as charges for real estate taxes, insurance, maintenance and various other items.

In the opinion of the Company, all of its and TDS’ properties are maintained in good operating condition and the production capacity of their plants is adequate for the near future. Because of the nature of the activities conducted, necessary additions can be made within a reasonable period of time.

Vehicle Services

Speedco currently owns 47 locations. Each location is sited on two or more acres visible from major interstates with easy access to those interstates. Each standard facility has a minimum of an 8,500 square foot building with three pitted service bays for lubrication service. In addition, a number of facilities also have tire lanes. Truck Lube 1 currently leases 4 locations. In the opinion of the Company, all of its properties are maintained in good operating condition and are adequate for the near future.

Item 3. LEGAL PROCEEDINGS

General

The Company is a party to a number of lawsuits and claims arising out of the normal course of business. While the results of such litigation are uncertain, management believes that the final outcome of any such litigation will not have a material adverse effect on the Company’s consolidated financial position or results of operations. Changes in assumptions, as well as actual experience, could cause estimates made by management to change.

Plumbers & Pipefitters Local 572 Pension Fund v. Bandag, et al.

On December 8, 2006, a purported class action shareholder complaint was filed in the Muscatine County District Court in the State of Iowa (the complaint) by Plumbers and Pipefitters Local 572 Pension Fund, seeking to pursue a class action on behalf of all of the Bandag shareholders. The complaint names Bandag, Martin G. Carver, the Chairman, President and Chief Executive Officer, and other directors, Gary E. Dewel, R. Stephen Newman, Roy J. Carver, Jr., James R. Everline, Phillip J. Hanrahan and Amy P. Hutton, as defendants. The complaint alleges, among other things, that in connection with the proposed business combination transaction with Bridgestone Americas Holding, Inc., the directors breached their fiduciary duties of due care and good faith by failing to solicit bids from other potential bidders and failing to maximize shareholder value and by creating deterrents to third party offers. Among other things, the complaint seeks class action status, and a court order enjoining the consummation of the merger and directing the defendants to take appropriate steps to maximize shareholder value. While the lawsuit is in its preliminary stage, Bandag believes that the claims in the lawsuit are without merit and intends to vigorously defend it.

Audra Smith v. Michael Rouse, et al. and Yolanda Jackson v. Michael Rouse, et al.

Bandag has been named as one of numerous defendants in two wrongful death actions brought in the Circuit Court of Warren County, Mississippi: These cases arise from an explosion and fire which occurred on May 17, 2002, at a rubber recycling plant in Mississippi, operated by Rouse Rubber Co., (Rouse) killing five employees and seriously injuring at least seven others. Bandag has been named in two of about six pending cases. Plaintiffs allege that a rubber recycling machine was dangerously designed or maintained, causing the explosion, and that Bandag may be passively liable as a “joint venturer” with Rouse. Bandag was named in the cases based on its majority ownership of Rouse prior to 1995. Bandag had only limited involvement with the equipment in question while it had an ownership interest in Rouse. Bandag did not manufacture, operate or repair the equipment in question.

Bandag was originally named as one of numerous defendants in the wrongful death actions brought in these two cases; however, Bandag was dismissed without prejudice from theJacksoncase for tactical reasons. TheSmithcase claims compensatory damages of $40 million and punitive damages of $25 million. However, it is unclear from the pleadings whether the plaintiffs seek punitive damages from all defendants, including Bandag, or only from certain defendants, not including Bandag. Astec, the manufacturer of the dryer system that exploded, settled with the plaintiffs in apparently all cases for approximately $45 million. This settlement will apply as a credit to the remaining defendants. Bandag has reached an agreement to settle with all known claimants including those inSmithandJackson, in consideration of the payment of a nominal amount. This matter remains pending subject to final approval of the necessary parties, including the court, of a proposed settlement agreement.

Bandag has reached an agreement to settle with all known claimants, including those inSmith and Jackson, in consideration of the payment of a nominal amount. The parties are in the process of securing the courts’ approval of the settlement.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Information concerning cash dividends declared and market prices of the Company’s Common Stock and Class A Common Stock for the last three fiscal years is as follows:

	2006	% Change	2005	% Change	2004
Dividends Declared Per Share
First Quarter	$0.335		$0.330		$0.325
Second Quarter	0.335		0.330		0.325
Third Quarter	0.335		0.330		0.325
Fourth Quarter	0.340		0.335		0.330

Total Year	$1.345	1.5	$1.325	1.5	$1.305

Stock Price Comparison(1)	Low		High	Low		High	Low		High
Common Stock
First Quarter	$40.57	--	45.42	$43.26	--	50.35	$40.31	--	49.95
Second Quarter	34.82	--	42.67	42.51	--	48.26	38.32	--	51.30
Third Quarter	32.79	--	42.38	41.89	--	47.93	42.91	--	48.20
Fourth Quarter	40.57	--	52.27	41.18	--	44.22	43.22	--	50.83
Year-end Closing Price			50.43			42.67			49.81
Class A Common Stock
First Quarter	$34.00	--	39.05	$39.20	--	46.45	$39.86	--	47.71
Second Quarter	29.59	--	37.00	37.70	--	43.36	35.38	--	46.98
Third Quarter	27.99	--	35.80	36.40	--	41.91	39.60	--	43.68
Fourth Quarter	34.28	--	51.50	35.60	--	37.62	39.10	--	46.69
Year-end Closing Price			49.96			36.05			46.33

(1)

High and low composite prices in trading on the New York and Chicago Stock Exchanges (ticker symbol BDG for Common Stock and BDGA for Class A Common Stock).

The approximate number of record holders of the Company’s Common Stock as of January 31, 2007 was 1,471 and the number of record holders of Class A Common Stock was 876. The Common Stock and Class A Common Stock are traded on the New York Stock Exchange and the Chicago Stock Exchange.

The following performance graph is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Act of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Act of 1934, except to the extent the Company specifically incorporates it by reference into such a filing.

The following is a line graph comparing the yearly percentage change during the last five years in the cumulative total shareholder return (assuming reinvestment of dividends) on the Corporation’s Common Stock and Class A Common Stock with the cumulative total returns of the Standard & Poor’s 500 Stock Index and the Dow Jones & Co., Inc. Tire and Rubber – Index (“Tire and Rubber Index). The graph assumes $100 invested on December 31 2001 in Bandag, Incorporated Common Stock and Class A Common Stock, the S&P 500 Stock Index and the Dow Jones & Co., Inc. Tire and Rubber – Index.

Comparison of Five Year Cumulative Total Return

	2001	2002	2003	2004	2005	2006
Bandag, Incorporated	100	118	136	165	140	184
S&P 500 Stock Index	100	78	100	111	117	135
Tire and Rubber - Index	100	45	58	83	85	97

Issuer Purchases of Equity Securities(1)

October 1, 2006 - December 31, 2006	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Programs	Maximum Number of Shares that May Yet be Purchased Under the Program
Common Stock
October 1 - October 31	2,274	$42.37	2,274	492,807
November 1 - November 30	3,038	$44.55	3,038	486,590
December 1 - December 31	2,761	$49.88	2,761	479,906

Total	8,073	$45.76	8,073	479,906	(1)(2)

Class A Common Stock
October 1 - October 31	2,528	$35.63	2,528	492,807
November 1 - November 30	3,179	$37.52	3,179	486,590
December 1 - December 31	3,923	$48.80	3,923	479,906

Total	9,630	$41.62	9,630	479,906	(1)(2)

(1)

On May 2, 2000, the Board of Directors approved a stock purchase program which authorized the purchase of up to 2,000,000 shares of outstanding Common Stock, Class A Common Stock, and/or Class B Common Stock in the open market or in private transactions. The program has no stated expiration date. No stock purchase program expired during the period covered by the above table.

(2)

Represents thetotal number of shares of Common Stock and/or Class A Common Stock remaining to be purchased under the stock purchase program.

Item 6. SELECTED FINANCIAL DATA

The following table sets forth certain Selected Financial Data for the periods and as of the dates indicated:

	2006	2005	2004	2003	2002
(In thousands, except per share data)
Net sales	$973,570	$914,640	$864,343	$826,354	$910,834
Earnings from continuing operations(1)(2)	36,556	49,479	66,880	60,200	50,053

Total assets	$752,948	$755,037	$730,727	$657,287	$616,128
Long-term debt and other obligations	22,964	24,061	29,963	35,259	45,373
Earnings per share from continuing operations
Basic	$ 1.89	$ 2.55	$ 3.47	$ 3.14	$ 2.53
Diluted	$ 1.87	$ 2.52	$ 3.39	$ 3.11	$ 2.52
Dividends Declared Per Share	$ 1.345	$ 1.325	$ 1.305	$ 1.285	$ 1.265

(1) In 2006, includes charges of $19,762 pre-tax, $12,667 after-tax, related to restructuring.

(2) In 2005, includes charges of $3,100 pre-tax, $2,130 after-tax, related to restructuring.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

OVERVIEW

General

The Company has three reportable operating segments – its Traditional Business which manufactures and sells precured tread rubber, equipment and supplies for retreading tires, Tire Distribution Systems, Inc. (TDS) which sells and maintains retread tires and new tires to principally commercial and industrial customers and Vehicle Services which provides quick-service truck lubrication, routine tire service and light truck maintenance through company-owned locations in the United States.

Bandag and its licensees have 844 franchise locations worldwide, with 36% located in the United States and 64% internationally. The majority of Bandag’s franchisees are independent operators of full service tire distributorships and the remaining are owned by either GCR, a Bridgestone wholly-owned company, or by TDS. The Traditional Business revenues primarily come from the sale of retread material and equipment to its franchisees. TDS offers complete tire management services including the complete line of Bandag retreads, new tires (commercial, retail and off-the-road), alignment and 24-hour road service. In Vehicle Services, Speedco, Inc. (Speedco) provides quick-service truck lubrication and routine tire service and Truck Lube 1 provides light truck maintenance.

Bandag anticipates strengthening Speedco’s success by adding more locations and related tire capability in 2007 while not compromising Speedco’s deserved reputation for convenient, quick, quality service. A major component of the expansion thus far has been to modify most of the existing locations and build new locations to include a Bandag designed and developed high-speed tire sales and service capability. Most new locations were built with a minimum of two high-speed tire lanes. The majority of the current locations were modified to include two tire lanes with the exception of those locations where current sites were not large enough to add two lanes and the adjoining property was unavailable or cost prohibitive. Speedco had $60,000,000 in capital expenditures in 2006 and anticipates capital expenditures of $16,000,000 to $18,000,000 in 2007. Bandag anticipates that the costs associated with the start up of new locations and the expansion of tire lanes at existing locations will continue to put pressure on Speedco margins and costs which may offset the positive contribution of Speedco.

Approximately 34% of Bandag’s retread material sales in North America come from national account contracts with a variety of major fleets. The depth of the Company’s franchisee network combined with the quality of its products has allowed Bandag to build a significant national account business. Significant fleet revenue is important to Bandag’s franchisees who act with Bandag as subcontractors to deliver products, information and services to national fleet customers. Bandag’s franchise agreements require its franchisees to buy their precured retreading material and equipment from Bandag, which gives Bandag a secure revenue stream. Growth in revenue can be achieved by expanding the amount of services that can be provided to a fleet by Bandag and its franchisees while continuing to provide value-added retread products. Bandag also generates significant cash flow which has historically been used to reinvest in the business, make debt payments, pay dividends, repurchase stock and other corporate purposes.

Despite an aggressive push by competitors in the Unites States retread business, Bandag has retained its leading position. In addition to its leading presence in the United States, Bandag also has an important presence internationally in Europe, Canada, Mexico, Brazil, South Africa and Australia.

Proposed Sale of the Company

On December 5, 2006, Bandag entered into a definitive merger agreement with Bridgestone Americas Holding, Inc. (BSAH) pursuant to which BSAH will acquire the outstanding shares of each class of stock of Bandag for US $50.75 per share in cash. This proposed merger remains subject to the receipt of shareholder approval and other regulatory approvals, as well as the satisfaction of customary closing conditions. The transaction is expected to be completed in the second quarter of 2007.

Trucking Industry

While shippers apply pressure to fleets from the service side, pressure on fleets from the cost side continues to intensify. High insurance costs, increased driver wages, and higher fuel costs continue to increase the pressure on fleets to find ways to reduce costs.

The pressure to reduce costs and still meet shipper demands requires fleets to focus on increasing revenue through better asset utilization. Fleets are looking for ways to reduce costs and to reduce the assets that are used to generate revenues. They are focusing, not just on reduction of downtime, but on better utilization of downtime that is mandated through regulation (e.g., when the truck is down due to regulated driver rest time, fleets will seek to use that time for vehicle maintenance). Fleets, particularly truckload carriers, will likely focus more on preventive maintenance and other services and products, such as those provided by Bandag, which can provide more reliable utilization of their assets.

New Tire Retread Pricing and Profitability

The relationship between new tire pricing and retread unit pricing has been narrowing primarily due to retread unit prices increasing at a faster rate than new tires and lower-priced imported new tires entering the market. Generally, a decreasing new tire to retread price ratio will put downward pressure on retread pricing and tend to increase the use of relatively less expensive new tires instead of retreads. Increases in imports of low priced new tires and the movement of major new tire manufacturers to lower their costs by utilizing overseas production has exacerbated this situation. However, the Company believes there still remains an inherent value in retreading to fleets that recognize the need for a well-managed tire program that combines quality new tires, retreads and tire management services to reduce operating costs.

Acquisitions

On April 1, 2006, the Company acquired Truck Lube 1, which provides light truck maintenance, for approximately $8,094,000. The Company recorded $3,800,000 of goodwill and $4,060,000 of other intangible assets.

During 2005, the Company’s TDS segment acquired one retread plant and five commercial and retail outlets for $2,978,000.

Divestitures

During the first quarter of 2006, the Company recorded the previously announced deferred loss on the sale of its business in South Africa. Bandag recorded a net loss on discontinued operations of $16,604,000, or $0.85 per diluted share. The loss was primarily due to the cumulative translation adjustment of $14,212,000 that was recorded in the Consolidated Balance Sheet related to the South African operation.

Bandag’s TDS subsidiary closed one location during 2005. The Company considers TDS to be essential in order to protect Bandag’s distribution where no independent Bandag franchise exists. Bandag will continue to divest TDS locations where an independent Bandag dealer is willing to buy the location and when it is a sensible decision for the Company to sell. Bandag will also continue to purchase locations for TDS if it is necessary to maintain Bandag’s distribution in an area. In currently unprofitable locations where TDS must operate to maintain Bandag’s presence to serve its fleet customers, the Company intends to continue to improve operational efficiencies to seek to achieve profitability.

Restructuring

During 2006, the North American business unit announced the closing of the tread production plant in Shawinigan, Quebec. Also during 2006, the Company announced that its pension plans have been closed to new hires in the United States and Canada, and that the existing pension plans for salaried and hourly U.S. employees and salaried Canadian employees were frozen effective December 31, 2006.

During 2006, the North American business unit reduced its company-wide employee workforce by approximately 200 through early retirements and voluntary and involuntary separation programs. The early retirement program, announced in the second quarter of 2006, was offered to eligible U.S. employees who had reached age 55 by December 31, 2006. Employees who accepted the offer will have five years added to their age in determining their pension benefit. Participants will also be able to purchase medical coverage through the Company until age 65.

Bandag recorded total pre-tax restructuring expenses of $19,762,000 in 2006. The Company’s North American business unit recorded pre-tax charges related to the restructuring of $13,072,000, the Company’s International business unit recorded $912,000 of pre-tax restructuring charges for an employee reduction program, and the Company’s European business unit recorded $5,778,000 of pre-tax restructuring charges for a workforce reduction of 48 persons.

The restructuring charges recorded consisted of an increase in pension benefit obligations of $8,316,000, termination benefits of $12,333,000, an increase in postretirement medical benefits of $1,400,000 and plant closing costs of $613,000. These costs were partially offset by a pension curtailment gain of $2,900,000 related to freezing the pension plans. As of December 31, 2006 approximately $3,919,000 of these restructuring costs remained accrued, substantially all of which is expected to be paid by December 31, 2007. The amounts related to the pension benefits and postretirement medical benefits were recorded in the Company’s Condensed Consolidated Balance Sheet which resulted in a decrease in the pension asset of $5,423,000 and an increase in the postretirement medical benefit liability of $1,400,000.

RESULTS OF OPERATIONS

Results include the Company’s three reportable operating segments – its Traditional Business, TDS and Vehicle Services.

Net Sales

Consolidated net sales in 2006 increased $58,930,000, or 6%, from 2005. Retread unit volume in the Traditional Business decreased 7% from 2005. Retread unit volume was negatively impacted by intense pressures from competitive retread tires and low-priced new tires. Net sales were positively impacted by an increase in Vehicle Services net sales of $31,033,000, or 38%, from 2005. Net sales were positively impacted by an increase in TDS net sales of $36,217,000, or 21%, from 2005, and by $10,984,000 due to the effect of translating foreign currency denominated net sales into U.S. dollars. The Company’s sales pattern is tied to the overall performance of the economy and to the level of trucking activity.

Gross Profit Margins

Consolidated gross profit margin for 2006 decreased 2.5 percentage points from 2005. Traditional Business gross profit margin decreased 2.7 percentage points from 2005. The decrease in Traditional Business gross profit margin is primarily due to higher raw material costs.

Operating and Other Expenses

Consolidated operating and other expenses increased $651,000 from 2005. Consolidated operating and other expenses in 2006 were positively impacted by the reduction in workforce and spending decreases due to the restructuring. Consolidated operating and other expenses in 2006 were negatively impacted by expenses related to Vehicle Services operations due to the start-up of new Speedco stores, the addition of tire lanes to existing stores and the acquisition of Truck Lube 1.

Other Income

Consolidated other income increased $4,241,000 from 2005. Other income was positively impacted by $2,900,000 due to legal settlements with raw material suppliers and by $845,000 due to the sale of the Company’s joint venture in India.

Net Earnings

Consolidated earnings from continuing operations in 2006 were $36,556,000, or $1.87 per diluted share, as compared to $49,479,000, or $2.52 in 2005. During 2006, the Company recorded a net loss on discontinued operations of $16,604,000, or $0.85 per diluted share, resulting in 2006 net earnings of $19,952,000, or $1.02 per diluted share.

TRADITIONAL BUSINESS

North America

The Company’s Traditional Business operations located in the United States and Canada, together with Open Road Technologies, are integrated and managed as one unit, which is referred to internally asNorth America. North America sells to independent dealers as well as to TDS and other subsidiaries. Sales to TDS and other subsidiaries are eliminated in consolidation.

The table below depicts the breakout of North America’s retread product sales between TDS and independent dealers:

(in thousands)	Year Ended December 31,
Retread Product Sales	2006		2005		Increase (Decrease)
Sales to Independent Dealers	$	407,786	$	401,930		1.5	%
Sales to TDS		17,438		16,740		4.2	%

Total Retread Product Sales	$	425,224	$	418,670		1.6	%

Retread product sales in 2006 were negatively impacted by a 6% decrease in retread material unit volume from the prior year. The decrease in retread material unit volume was offset by the price increases in May 2005 and January 2006. Net sales for 2006 were positively impacted by increased equipment sales of $3,502,000. Net sales were also positively impacted by the effect of translating Canadian dollar foreign currency denominated results to U.S. dollars of $3,790,000 for 2006.

Higher raw material costs and an increase in sales incentive programs primarily resulted in a 2.5 percentage point decrease in North America’s gross profit margin in 2006 as compared to 2005.

North American operating and other expenses in 2006 were $6,223,000, or 6%, lower than 2005 expenses. The decrease in operating and other expenses was primarily due to the reduction in workforce and spending decreases due to the restructuring. Other income for 2006 was positively impacted by $2,005,000 due to legal settlements with raw material suppliers. Restructuring expenses of $13,072,000 were recorded in 2006.

Restructuring expenses and lower gross profit margin were the primary reasons for a decrease for North America of $13,642,000 in earnings before income taxes, minority interest and discontinued operations from 2005. North America recorded earnings before income taxes, minority interest and discontinued operations of $49,384,000 in 2006 as compared to $63,026,000 in 2005.

EMEA

The Company’s operations located in Europe principally service markets in European countries, but also export to certain other countries in the Middle East and Northern and Central Africa. This collection of countries is under one management group and is referred to internally asEMEA. Net sales in EMEA decreased $3,953,000, or 4%, from 2005, on a 1% increase in volume. Net sales in EMEA for 2006 were negatively impacted by intense competitive pressures and by a decrease in fleet sales due to the loss of fleet contract business. Net sales for EMEA in 2006 were also negatively impacted by $637,000 due to the effect of translating foreign currency denominated net sales to U.S. dollars.

Gross profit margin decreased 5.0 percentage points from 2005, primarily due to higher raw material costs. Operating and other expenses were $1,943,000, or 6%, lower than 2005 expenses. The decrease in 2006 operating and other expenses is primarily due to a decrease in personnel related costs. Other income for 2006 was positively impacted by $340,000 due to a legal settlement with a raw material supplier. Restructuring expenses of $5,778,000 were recorded in 2006 compared to $3,100,000 recorded in 2005.

Restructuring expenses and lower gross profit margin were the primary reasons for a decrease for EMEA of $6,618,000 in earnings before income taxes, minority interest and discontinued operations from 2005. EMEA recorded a loss before income taxes, minority interest and discontinued operations of $6,880,000 in 2006 as compared to a loss on the same basis of $262,000 in 2005.

International

The Company’s exports from North America to markets in the Caribbean, Central America, South America and Asia, along with operations in Brazil, Mexico and Venezuela and royalties from licensees in Australia and South Africa, are combined under one management group referred to internally asInternational. International net sales decreased $10,287,000, or 8%, from 2005. Retread material unit volume decreased 14% from 2005. Excluding South Africa, unit volume increased 1% and net sales increased 8% for 2006 as compared to 2005. Net sales were positively impacted by price increases and by $7,831,000 due to the effect of translating foreign currency denominated net sales to U.S. dollars.

Gross profit margin decreased 2.4 percentage points from 2005, primarily due to higher raw material costs. Operating and other expenses decreased $2,669,000, or 10%, from 2005, primarily due to the sale of South Africa. Other income for 2006 was positively impacted by $555,000 due to a legal settlement with a raw material supplier and by $845,000 due to the sale of the Company’s joint venture in India. International recorded $912,000 of restructuring expenses in 2006.

Lower volume and gross profit margin were the primary reasons for a decrease for International of $3,253,000 in earnings before income taxes, minority interest and discontinued operations. International recorded earnings before income taxes, minority interest and discontinued operations of $11,568,000 in 2006 as compared to $14,821,000 in 2005.

During 2006 the Company recorded the previously announced deferred loss on the sale of its business in South Africa. Bandag recorded a net loss on discontinued operations of $16,604,000. The loss was primarily due to the cumulative translation adjustment of $14,212,000 that was recorded in the Consolidated Balance Sheet related to the South African operation.

TIRE DISTRIBUTION SYSTEMS, INC.

TDS net sales increased $36,217,000, or 21%, as compared to 2005. TDS net sales were positively impacted by increased unit sales and higher prices.

TDS gross profit margin decreased 1.1 percentage points from 2005 primarily due to an increase in sales of products which carry lower margins. Operating and other expenses increased $2,688,000, or 7%, but decreased as a percentage of sales.

Higher net sales was the primary reason for an improvement in 2006 for TDS of $5,135,000 in earnings before income taxes, minority interest and discontinued operations. TDS recorded earnings before income taxes, minority interest and discontinued operations of $11,719,000 in 2006 as compared to $6,584,000 in 2005.

VEHICLE SERVICES

The Company’s Speedco, Inc. and Truck Lube 1 operations are combined under one management group referred to internally asVehicle Services. Truck Lube 1, which provides light truck maintenance, was purchased in April 2006 and contributed $7,079,000 to net sales in 2006. Speedco net sales increased $22,909,000, or 28%, for 2006. For 2006, Speedco same store lube sales increased $8,378,000, or 11%, and same store tire sales increased $626,000, or 11%, as compared to 2005. Same store revenue is comprised of locations that have operated for twelve full months. As of December 31, 2006, same store lube sales included 35 locations and same store tire sales included 21 locations. Speedco had 47 locations, 39 with tire service capabilities, as of December 31, 2006, compared to 35 locations, 23 with tire service capabilities, at the same time last year.

Vehicle Services gross profit margin decreased 0.6 percentage points from 2005. Operating and other expenses increased $10,906,000, or 41%, as compared to 2005. Gross profit margin and operating and other expenses were negatively impacted by expenses associated with the start-up of new Speedco stores and the addition of tire lanes to existing stores.

Lower gross profit margin and higher operating and other expenses were the primary reasons for a decrease in 2006 for Vehicle Services of $1,093,000 in earnings before income taxes, minority interest and discontinued operations. Vehicle Services recorded a loss before income taxes, minority interest and discontinued operations of $512,000 in 2006 as compared to earnings on the same basis of $581,000 in 2005.

OTHER

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

RESULTS OF OPERATIONS

Results include the Company’s three reportable operating segments – its Traditional Business, TDS and Vehicle Services.

Net Sales

Consolidated net sales in 2005 increased $50,297,000, or 6%, from 2004. This included an increase of $27,643,000 of net sales for Speedco and an increase of $17,753,000 due to the effect of translating foreign currency denominated net sales into U.S. dollars. Net sales in the Traditional Business were also positively impacted by price increases. These increases in consolidated net sales were offset by a $32,273,000 decrease in TDS net sales primarily as a result of the divestitures in 2004. Retread unit volume in the Traditional Business was even with the prior year. The Company’s sales pattern is tied to the overall performance of the economy and to the level of trucking activity.

Other Income

Other income in 2004 includes a gain of approximately $6,000,000 due to the sale of assets.

Gross Profit Margins

Consolidated gross profit margin for 2005 decreased 2.5 percentage points from 2004. Speedco’s gross profit margin declined 6.2 percentage points, primarily due to expenses associated with the start-up of new stores and the addition of tire lanes to existing facilities. Traditional Business gross profit margin decreased 4.2 percentage points from 2004, primarily due to higher raw material costs and a decline in the profitability of fleet contract business. TDS’ gross margin increased 2.4 percentage points.

Operating and Other Expenses

Consolidated operating and other expenses increased $4,608,000, or 2%, from 2004. Speedco operating and other expenses increased $11,358,000, primarily due to the additional stores and tire lanes. EMEA operating and other expenses were negatively impacted by $3,100,000 for charges related to a reduction in workforce. TDS operating and other expenses decreased $9,242,000 from 2004, primarily due to the divestitures in 2004.

Interest Income

Consolidated interest income increased $3,207,000 from 2004, primarily due to an increase in interest rates.

Income Taxes

The effective tax rate was 31.3% for 2005 as compared to 20.8% for 2004. The lower effective tax rate in 2004 was largely attributable to $7,200,000 of tax adjustments in 2004, resulting primarily from the reassessment of certain tax matters.

Net Earnings

Consolidated net earnings in 2005 were $49,479,000, or $2.52 per diluted share, as compared to $66,880,000, or $3.39 per diluted share in 2004. Consolidated net earnings in 2004 included $3,700,000, or $0.19 per diluted share, due to the sale of assets. Consolidated net earnings in 2004 were also favorably impacted by $7,200,000, or $0.37 per diluted share, for the resolution and reassessment of certain tax matters.

TRADITIONAL BUSINESS

North America

North America sells to independent dealers as well as to TDS and other subsidiaries. Sales to TDS and other subsidiaries are eliminated in consolidation. Accordingly, as TDS locations are divested and become unaffiliated Bandag customers, sales to independent dealers should benefit.

The table below depicts the breakout of North America’s retread product sales between TDS and independent dealers:

(in thousands)	Year Ended December 31,
Retread Product Sales	2005		2004		Increase (Decrease)
Sales to Independent Dealers	$	401,930	$	355,305		13.1	%
Sales to TDS		16,740		24,253		-31.0	%

Total Retread Product Sales	$	418,670	$	379,558		10.3	%

The increase in retread product sales to independent dealers is due to several factors, including price increases in December 2004 and May 2005, a 3% increase in retread material unit volume, increased sales to independent dealers that purchased TDS locations and the positive effect of translating Canadian dollar foreign currency denominated results to U.S. dollars of approximately $3,819,000. Retread product sales increased at a higher rate than the unit volume increased due to the impact of price increases in December 2004 and May 2005. The decrease in retread product sales to TDS is primarily due to the divestitures and closures of TDS locations.

Higher raw material costs and a decline in the profitability of fleet contract business primarily resulted in a 5.5 percentage point decrease in North America’s gross profit margin in 2005 as compared to 2004. North America increased prices in December 2004, May 2005 and November 2005 to partially offset the increased raw material prices. The November 2005 price increase did not have a material impact on 2005 gross margins.

North American operating and other expenses in 2005 were $6,570,000, or 6%, lower than 2004 expenses. North American operating expenses in 2004 included $2,400,000 of expenses related to Quality Designs Systems, Inc. (QDS) which was divested in December 2004. North American operating and other expenses in 2004 were negatively impacted by a $1,100,000 adjustment related to a reassessment of sales tax accruals. North American other income in 2004 was positively impacted by a gain on sale of assets of approximately $6,000,000, which included a gain of $1,937,000 from the sale of certain assets of QDS and a gain of approximately $3,400,000 from the sale of the Chino, California facility. North America recorded income before income taxes and minority interest of $63,026,000 in 2005 as compared to $72,529,000 in 2004.

EMEA

Net sales in EMEA increased $709,000, or 1%, from 2004, on a 7% decrease in volume. The increase in net sales is primarily due to the effect of translating foreign currency denominated net sales to U.S. dollars of approximately $1,392,000 and increased selling prices. The primary reason for the decline in retread material unit volume was the loss of several dealers during 2004. Gross profit margin increased 0.6 percentage points from 2004, primarily due to price increases targeted to improve margins.

Operating and other expenses increased $3,628,000, or 12%, from 2004, primarily due to charges of $3,100,000 for a reduction in workforce. EMEA recorded a loss before income taxes and minority interest of $262,000 in 2005 as compared to income on the same basis of $2,789,000 in 2004.

International

International net sales increased $18,712,000, or 18%, from 2004. Retread material unit volume decreased 5% from 2004 which includes a 12% decrease in volume in Brazil. The primarily reason for the decline in retread material unit volume in Brazil was the loss of several dealers during 2004. Net sales were positively impacted by price increases and by $12,542,000 due to the effect of translating foreign currency denominated net sales to U.S. dollars. Gross profit margin decreased 2.6 percentage points from 2004, primarily due to higher raw material costs.

Operating and other expenses increased $3,849,000, or 16%, from 2004, primarily due to the higher translated value of the foreign Brazilian Real. International recorded earnings before income taxes and minority interest of $14,821,000 in 2005 as compared to $14,886,000 in 2004.

TIRE DISTRIBUTION SYSTEMS, INC.

TDS net sales decreased $32,273,000, or 16%, as compared to 2004, primarily due to the divestitures and closures in 2004. TDS net sales were positively impacted by higher prices and an increase in service revenue and new tire sales.

The divested and closed locations had net sales and a loss before income taxes and minority interest of $60,504,000 and $600,000, respectively, for 2004.

TDS gross profit margin increased 2.4 percentage points from 2004 primarily due to higher selling prices and increased service revenue, which has higher margins.

Operating and other expenses decreased $9,242,000, or 18%, primarily due to the divestitures in 2004. Operating and other expenses were positively impacted by a decrease in reserves for insurance. TDS recorded earnings before income taxes and minority interest of $6,584,000 in 2005 as compared to $1,506,000 in 2004.

VEHICLE SERVICES

The net sales of Speedco, which was acquired February 13, 2004, and its six licensees which were acquired June 10, 2004, increased $27,643,000, or 50%, for 2005. The increase in net sales is primarily due to an increase in volume at existing locations, the addition of two facilities and the addition of tire lanes to eighteen existing facilities. Gross profit margin decreased 6.2 percentage points and operating and other expenses increased $11,358,000. The decrease in gross profit margin and the increase in operating and other expenses are primarily due to the additional facilities and the installation of tire lanes.

Speedco recorded earnings before income taxes and minority interest of $581,000 in 2005 as compared to $6,249,000 in 2004. The decrease is primarily due to the additional facilities and the installation of tire lanes at existing facilities.

OTHER

The Company’s Other segment consists of corporate expenses, interest income on invested cash balances and interest expense on long-term and short-term debt. Corporate expenses and depreciation increased $1,676,000 primarily due to net foreign exchange gains and losses on U.S. denominated investments. Consolidated interest income increased $3,207,000 from 2004, primarily due to an increase in interest rates.

IMPACT OF INFLATION AND CHANGING PRICES

Historically, it has generally been the Company’s practice to adjust its selling prices and sales allowances to reflect changes in production and raw material costs in order to maintain its gross profit margin. To soften the impact of higher raw material costs caused by increases in oil prices the Company increased selling prices in the United States and Canada effective May 1, 2005 and January 1, 2006, and increased selling prices in some foreign locations during the year. The Company may continue to increase prices if raw material costs rise further; however, due to competitive pressure and the decreasing difference between the price on a Bandag retread and a substitute new tire, the Company believes its ability to continue to pass on such increases may be diminished. The ability of the Company to raise prices does not eliminate its exposure to pricing risks on its fleet contract business due to the terms of the agreements.

Replacement of fixed assets requires a greater investment than the original asset cost due to the impact of general price level increases over the useful lives of plant and equipment. This increased capital investment would result in higher depreciation charges affecting both inventories and cost of products sold.

FINANCIAL CONDITION

Liquidity and Capital Resources

At December 31, 2006, the Company had cash and cash equivalents of $45,900,000 as compared to $97,071,000 at December 31, 2005. At December 31, 2006, the Company had investments of $80,300,000, as compared to $60,150,000 at December 31, 2005. The Company’s ratio of total current assets to total current liabilities was 2.9 to 1 at December 31, 2006 with current assets exceeding current liabilities by $280,208,000. The Company believes it has an adequate cash balance for future cash needs.

Net cash provided by operating activities for the twelve months ended December 31, 2006 was $81,577,000 as compared to $56,983,000 for the same period of 2005. The increase in net cash provided by operating activities for 2006 is primarily due to a decrease in accounts receivables and other assets.

The Company typically funds its capital expenditures from operating cash flows. During 2006, the Company spent $77,444,000 for capital expenditures as compared to $65,647,000 in 2005. The Company anticipates capital expenditures of $45,000,000 to $55,000,000 in 2007. The increase in capital expenditures in 2005 and 2006 from prior years was primarily due to expenditures made by Speedco for new facilities and expansion of existing facilities.

On February 13, 2004, the Company acquired an 87.5% majority interest in Speedco, Inc. from its founders and Equilon Enterprises, LLC, a Royal Dutch Shell Group company. In total, Bandag paid $53,716,000 for its 87.5% interest and to assume and retire $20,079,000 of debt. On June 10, 2004, Speedco, Inc. acquired the assets of six licensed locations, which were owned and operated by PM Express, Inc. Speedco paid $15,609,000 for these assets. During 2004, the Company sold 19 TDS locations for cash proceeds of $13,407,000.

The Company invests excess funds over various terms, but only instruments with an original maturity date of over 90 days are classified as investments for balance sheet purposes. The Company’s purchases of investments exceeded maturities by $20,150,000 during 2006, resulting in total investments of $80,300,000 as of December 31, 2006.

As of December 31, 2006, the Company had available uncommitted and committed lines of credit totaling $72,030,000 in the United States for working capital purposes. Also, the Company’s foreign subsidiaries had approximately $35,330,000 in credit and overdraft facilities available to them. From time to time during 2006, the Company borrowed funds to supplement operational cash flow needs or to settle intercompany transactions. The Company’s long-term liabilities totaled $22,964,000 at December 31, 2006, which is approximately 4% of the combined total of long-term liabilities and shareholders’ equity; and is a decrease of $1,097,000 from December 31, 2005.

During the year, the Company paid $12,551,000 on short-term notes payable and long-term obligations compared to $16,938,000 in 2005.

Cash dividends paid totaled $26,053,000 in 2006 compared to $25,774,000 in 2005. Cash dividends per share declared were $1.345 in 2006 compared to $1.325 in 2005.

During the year, the Company purchased 237,464 shares of Common Stock and Class A Common Stock at an average purchase price of $34.01 per share, as compared to the purchase of 210,443 shares of Common Stock and Class A Common Stock at an average price of $38.27 for 2005.

OFF BALANCE SHEET ARRANGEMENTS

The Company has no off balance sheet arrangements.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

Following is a summary of the Company’s commitments as of December 31, 2006 (in thousands):

	Payments Due by Period
Contractual Obligations	Total		2007		2008-2009		2010-2011		After 2011
Long-term debt	$	5,714	$	5,714	$	--	$	--	$	--
Interest on long-term debt		371		371		--		--		--
Operating leases		50,009		10,078		13,769		8,858		17,304
Raw material purchase commitments		161,044		161,044		--		--		--
Pension(1)		3,878		554		1,108		1,108		1,108
Post retirement medical liability(1)		6,708		624		1,279		1,279		3,526
Underfunded pension liability		6,572		--		--		--		6,572
DMR commitments(2)		3,575		1,050		2,025		500		--
Other obligations		18,570		8,262		3,944		1,453		4,911

Total contractual obligations	$	256,441	$	187,697	$	22,125	$	13,198	$	33,421

			Total Amounts			Amount of Commitments Expiration Per Period
Other Commercial Commitments			Committed			2007			2008-2009			2010-2011			After 2011
Standby Letters of Credit(3)			$	19,179		$	19,179		$	--		$	--		$	--

(1)	Future pension contributions are expected to approximate 2007 estimates of $554. Post retirement medical contributions are expected to approximate 2007 estimates of $624.

(2)	The Company has entered into various agreements with certain customers and is obligated to reimburse those customers an amount based on an increase in sales volume. The actual payments will range from $0 to the total obligated amounts.

(3)	Standby letters of credit are provided to the Company’s insurance administrators to cover costs associated with self insurance liabilities.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Financial Risk Management

The Company is exposed to market risk from changes in interest rates, foreign exchange rates, and commodity prices. To mitigate such risks, the Company enters into various derivative transactions. All derivative transactions are authorized and executed pursuant to clearly defined Company policies and procedures, which strictly prohibit the use of financial instruments for trading or speculative purposes. Analytical techniques and selective derivative instruments are applied to manage and monitor such market exposures.

Foreign Currency Exposure

Foreign currency exposures arising from cash flow transactions include firm commitments and anticipatory transactions. Translation exposure is also part of the overall foreign exchange risk. The Company’s exposure to foreign currency risks exists primarily with the Brazilian real, Canadian dollar, Mexican peso and European Union euro. The Company regularly enters into foreign currency contracts primarily using foreign exchange forward contracts and options to manage the foreign currency risks associated with most of its firm commitment exposures. The Company also employs foreign exchange forward contracts as well as option contracts to manage the foreign currency risks associated with approximately 40% — 60% of its anticipated future cash flow transactions within the coming twelve months. The notional amount of these contracts at December 31, 2006 and 2005 were zero and $146,000, respectively. The Company also limits its exposure to foreign currency fluctuations by entering into offsetting asset or liability positions and by establishing and monitoring limits on unmatched positions. The Company’s pre-tax earnings from foreign subsidiaries and affiliates translated into U.S. dollars using a weighted-average exchange rate was $6,637,000 and $16,720,000 for the years ending December 31, 2006 and 2005, respectively. On that basis, the potential loss in the value of the Company’s pre-tax earnings from foreign subsidiaries resulting from a hypothetical 10% adverse change in foreign currency exchange rates would have been $544,000 in 2006 and $1,508,000 in 2005.

The Company also has foreign currency exposure arising from the translation of the Company’s net equity investment in its foreign subsidiaries to U.S. dollars. The Company generally views as long-term its investments in foreign subsidiaries with functional currencies other than the U.S. dollar. The primary currencies to which the Company is exposed as a result of its investment in foreign subsidiaries are the European euro, Brazilian real, Mexican peso and Canadian dollar. A 10% change in foreign currency exchange rates from balance sheet date levels would have impacted the Company’s net foreign investments by $7,700,000 and $11,773,000 at December 31, 2006 and 2005, respectively.

Interest Rate Exposure

In order to mitigate the impact of fluctuations in the general level of interest rates, the Company generally maintains a large portion of its debt as fixed rate in nature by borrowing on a long-term basis. At December 31, 2006 and 2005, the Company had outstanding debt of $5,714,000 and $11,429,000 respectively. At December 31, 2006 and 2005, the fair value of the Company’s debt was $5,781,000 and $11,686,000, respectively. In addition, at December 31, 2006 and 2005, the fair value of securities held for investment was $80,300,000 and $73,198,000, respectively. The fair value of the Company’s total long-term debt and its securities held for investment would not be materially affected by a hypothetical 10% adverse change in interest rates. Therefore, the effects of interest rate changes on the fair value of the Company’s financial instruments are limited. Securities held for investment primarily consist of obligations of states and political subdivisions of a short-term nature.

Commodities Exposure

Due to the nature of its business, the Company procures almost all of its synthetic rubber, which is the predominant raw material used in manufacturing tire tread, at quarterly fixed rates using contracts with the Company’s main suppliers. Historically, the Company increases its selling prices and sales allowances to reflect significant changes in commodity costs; however, due to competitive pressures and the decreasing difference between the price on a Bandag retread and a substitute new tire, the Company believes its ability to continue to pass on such increases may be diminished. To soften the impact of higher raw material costs caused by increases in oil prices, the Company increased selling prices in the United States and Canada effective May 1, 2005 and January 1, 2006 and increased selling prices in some foreign locations during the year. Therefore, the Company’s exposure is limited to the extent selling price increases fail to offset increases in commodity costs. The ability of the Company to raise prices does not eliminate its exposure to pricing risks on its fleet contract business due to the terms of the related agreements.

CRITICAL ACCOUNTING POLICIES

Bandag’s financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. The Company believes that the following are some of the more critical judgment areas in the application of the accounting policies that currently affect its financial condition and results of operations. The Company’s senior management has discussed the development and selection of critical accounting estimates and related management’s discussion and analysis disclosures with the audit committee of the board of directors.

Accounts Receivable

Bandag’s global credit policies are corporately determined and managed through business unit credit and financial management departments to insure compliance with local laws and to effect proper credit and collections at the country level.

A significant percentage of the Company’s global accounts receivable are obligations of franchisees. The majority of these accounts receivable are extended within North America. However, Bandag competes in the global marketplace and credit is also extended outside of the United States. Bandag continuously monitors political, social and economic risks to insure sound credit decisions are made within these foreign markets.

Bandag also extends credit in North America to customers in the trucking and transportation industry. Credit is extended to large national and regional customers on a contractual basis through Bandag. Smaller regional and local trucking customers are provided credit through TDS, Speedco and Trucklube 1.

Management evaluates the collectibility of accounts receivable based on a combination of factors. In circumstances where management is aware of a specific customer’s inability to meet its financial obligations, a specific reserve for bad debts is recorded against amounts due to reduce the net recognized receivable to the amount management reasonably believes will be collected. General reserves for bad debts are maintained based upon the length of time the receivables are past due and upon historical write-off experience by geographic location. Credit losses have been within management’s expectations.

Goodwill and Trade Name Asset Valuation

While goodwill is not amortized, it is subject to periodic reviews for impairment. The Company utilizes discounted cash flow methods to review the carrying value of goodwill and trade name assets for impairment periodically (at least annually) and whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. Changes in estimates of future cash flows caused by items such as unforeseen events or changes in market conditions could negatively affect the reporting unit’s goodwill and trade name assets’ fair value and result in an impairment charge. The Company cannot predict the occurrence of events that might adversely affect the reported value of goodwill and trade name assets that totaled $35,303,000 at December 31, 2006; however, the current fair values of the Company’s reporting unit’s goodwill and trade name assets are in excess of carrying values.

Income Taxes

The Company utilizes the asset and liability method of accounting for deferred income taxes, which requires that deferred tax assets and liabilities be recorded to reflect the future tax consequences of temporary timing differences between the tax and financial statement basis of assets and liabilities. At December 31, 2006, the Company had net deferred tax assets of $28,290,000. This balance consists of approximately $32,670,000 of net deferred tax assets primarily related to the timing of income and deductions for tax versus books, and $4,380,000 of net deferred tax liabilities primarily related to the unremitted earnings of foreign subsidiaries. Deferred taxes on the unremitted earnings of foreign subsidiaries are provided under the assumption that all profits of the foreign subsidiaries will be repatriated to the United States and all foreign taxes paid will be available to offset United States taxes. In addition, any deferred tax asset is reviewed annually to determine the probability of realizing the asset. If it is determined unlikely that the asset will be fully realized in the future, a valuation allowance is established against the asset. Refer to Note 11, “Income Taxes,” of the consolidated financial statements contained in Item 8 of this Annual Report on Form 10-K for further details.

The Company believes it has a reasonable basis in the tax law for all of the positions it takes on the various federal, state and foreign tax returns it files. However, in recognition of the fact that various taxing authorities may not agree with the Company’s position on certain issues, that the cost of litigation in maintaining the positions that the Company has taken on various issues might be significant, and that the taxing authorities may prevail in their attempts to overturn such positions, the Company maintains tax reserves. These reserves, the potential issues they are intended to cover, as well as their adequacy to do so, are reviewed both internally and with outside tax professionals on a regular and frequent basis. Periodic adjustments are made to such reserves to reflect the lapsing of statutes of limitations, closings of ongoing examinations or commencement of new examinations, and changes in tax law or interpretations of tax law.

Marketing Programs

Distribution Management Request (DMR) is a marketing program designed to increase Company market share by enhancing dealer capability and franchise value. Enhanced dealer capabilities and franchise values are achieved primarily through Company-provided financial assistance towards the acquisition of equipment, service vehicles, facility expansions and other items aligned with Company goals.

Under the DMR Program, the Company provides financial assistance primarily in the form of DMR promissory notes from the dealer to Bandag. The proceeds from the promissory notes can only be used by the dealer toward the acquisition of equipment (including equipment sold by the Company), service vehicles, facility expansions and other items aligned with Company goals. The notes generally have a term of up to five years. However, if the dealer achieves a business objective, typically purchasing a specified amount of tread rubber each year, then the Company forgives either part or all of the principal and interest for that year. The Company records a reduction in sales for the costs of the program as financial assistance is provided. The DMR reserve at December 31, 2006, 2005, and 2004 was $13,146,000, $13,622,000 and $14,189,000, respectively. In 2006, 2005 and 2004, DMR costs of $10,004,000, $9,236,000 and $7,830,000, respectively, were recorded as a reduction of sales. For those DMR agreements that do not include notes, the Company records expense and a corresponding liability, or discloses such agreements in accordance with SFAS No. 5, “Accounting for Contingencies.”

Pension Plans

The Company accounts for its defined benefit pension plans in accordance with SFAS No. 87, “Employers’ Accounting for Pensions,” which requires that amounts recognized in financial statements be determined on an actuarial basis. A substantial portion of the Company’s pension amounts relate to its defined benefit plans in the United States. The Company has not made any contributions to any of the United States pension plans since plan year 1997. SFAS No. 87 and the policies used by the Company generally reduce the volatility of pension income or expense arising from changes in the pension liability discount rates and the performance of the pension plan’s assets.

An important element in determining the Company’s pension income or expense in accordance with SFAS No. 87 is the expected return on assets. The Company’s long-term rate of return assumption for its United States plans is 5.5% as of December 31, 2006. This assumption is based on expected returns in the structured fixed income portfolio in which the pension assets are presently invested.

Each year, the Company determines the discount rate to be used to discount plan liabilities. The discount rate reflects the current rate at which the pension liabilities could be effectively settled at the end of the year. In estimating this rate, the Company looks to rates of return on high quality, fixed-income investments. The discount rate for December 31, 2006 was 5.8%.

For the years ended December 31, 2006 and 2005, the Company recognized consolidated pre-tax pension expense of $4,947,000 and $4,751,000, respectively. The Company estimates pension expense will be approximately $96,000 for 2007. Refer to Note 15 of the consolidated financial statements for further details.

A 50 basis point increase in the assumed discount rate would have decreased pension and other postretirement benefit obligations by approximately $7,282,000 at December 31, 2006, and decreased pension and postretirement benefit costs by approximately $1,007,000. A 50 basis point decrease in the assumed discount rate would have increased pension and other postretirement benefit obligations by approximately $8,098,000 at December 31, 2006, and increased pension and postretirement benefit costs by approximately $1,135,000. A 50 basis point increase or decrease in the assumed expected long-term rate of return on plan assets would have decreased or increased pension costs by approximately $569,000 for 2006, respectively.

NEW ACCOUNTING STANDARDS

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” an interpretation of FAS 109, “Accounting for Income Taxes,” (FIN 48), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 as of January 1, 2007, as required. The cumulative effect of adoption will be recorded in retained earnings. The Company has not determined the effect, if any, the adoption of FIN 48 will have on the Company’s financial position and results of operation.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132 (R)” (SFAS 158). SFAS 158 requires balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit plans. Under SFAS 158, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that had not been recognized under previous accounting standards are now recognized in Accumulated Other Comprehensive Income in Equity, net of tax effects, until they are amortized as a component of net periodic benefit cost. At December 31, 2006 the effect of adoption of SFAS 158 was to increase assets by $6,609,000, increase liabilities by $1,173,000 and increase stockholders’ equity by $5,436,000. SFAS 158 will also require the Company to change the date used to measure its defined benefit pension and other postretirement obligations from September 30 to December 31. The measurement date change will be effective as of December 31, 2008. The incremental pension cost recognized as a result of this change in measurement date will be recognized as an adjustment to retained earnings. The measurement date change is not expected to have a material impact on financial position, results of operations, or liquidity.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See the discussion under the caption “Quantitative and Qualitative Disclosures About Market Risk” in Item 7 of this Form 10-K, “Management’s Discussion and Analysis of Operations and Financial Condition,” which is incorporated herein by reference.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

	Page
Report of Management	31
Report of Independent Registered Public Accounting Firm - Internal Control
Over Financial Reporting	32
Report of Independent Registered Public Accounting Firm - Consolidated
Financial Statements	33
Consolidated Balance Sheets as of December 31, 2006 and 2005	34
Consolidated Statements of Earnings for the years ended
December 31, 2006, 2005 and 2004	36
Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005 and 2004	37
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 2006, 2005 and 2004	38
Notes to Consolidated Financial Statements	41

Report of Management

We are responsible for the preparation and integrity of the consolidated financial statements appearing in our Annual Report on Form 10-K. The consolidated financial statements were prepared in conformity with United States generally accepted accounting principles and include amounts based on management’s estimates and judgments. All other financial information in this report has been presented on a basis consistent with the information included in the financial statements.

We are also responsible for establishing and maintaining adequate internal controls over financial reporting. We maintain a system of internal controls that is designed to provide reasonable assurance as to the fair and reliable preparation and presentation of the consolidated financial statements, as well as to safeguard assets from unauthorized use or disposition.

Our control environment is the foundation for our system of internal controls over financial reporting and is embodied in our Global Ethics Policy. It sets the tone of our organization and includes factors such as integrity and ethical values. Our internal controls over financial reporting are supported by formal policies and procedures which are reviewed, modified and improved as changes occur in business conditions and operations.

The Audit Committee of the Board of Directors, which is composed solely of outside directors, meets periodically with members of management, the internal auditors and the independent auditors to review and discuss internal controls over financial reporting and accounting and financial reporting matters. The independent auditors and internal auditors report to the Audit Committee and accordingly have full and free access to the Audit Committee at any time.

We conducted an evaluation of the effectiveness of our internal controls over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Although there are inherent limitations in the effectiveness of any system of internal controls over financial reporting, based on our evaluation, we have concluded that our internal controls over financial reporting were effective as of December 31, 2006.

Ernst & Young LLP, an independent registered public accounting firm, has issued an attestation report on management’s assessment of internal control over financial reporting, which is included herein.

Bandag, Incorporated


/s/ Martin G. Carver		/s/ Warren W. Heidbreder

Martin G. Carver		Warren W. Heidbreder
Chairman of the Board,		Vice President, Chief Financial
Chief Executive Officer and President		Officer (Principal Financial Officer)
(Principal Executive Officer)
/s/ Jeffrey C. Pattison

Jeffrey C. Pattison
Corporate Controller
(Principal Accounting Officer)

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors
Bandag, Incorporated

We have audited management’s assessment, included in the accompanying Report of Management, that Bandag, Incorporated maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Bandag, Incorporated’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Bandag, Incorporated maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Bandag, Incorporated maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Bandag, Incorporated as of December 31, 2006 and the related consolidated statements of earnings, cash flows and changes in shareholders’ equity for each of the years ended December 31, 2006, 2005 and 2004, and our report dated March 15, 2007 expressed an unqualified opinion thereon.

/s/Ernst & Young LLP
Chicago, Illinois

March 15, 2007

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors
Bandag, Incorporated

We have audited the accompanying consolidated balance sheets of Bandag, Incorporated as of December 31, 2006 and 2005, and the related consolidated statements of earnings, cash flows and changes in shareholders’ equity for each of the years ended December 31, 2006, 2005 and 2004. Our audits also included the financial statement schedule listed in the Index at Item 15(2). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bandag, Incorporated at December 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the years ended December 31, 2006, 2005 and 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, on January 1, 2006, Bandag, Incorporated changed its method of accounting for share-based awards to conform with Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment.” Additionally, on December 31, 2006, Bandag, Incorporated changed its method of accounting for defined benefit pension and other postretirement benefit plans to conform with SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132 (R).”

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Bandag Incorporated’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2007 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP
Chicago, Illinois

March 15, 2007

Bandag, Incorporated
Consolidated Balance Sheets

	December 31
In thousands	2006			2005
Assets
Current Assets
Cash and cash equivalents	$	45,900		$	97,071
Investments - Note 5		80,300			60,150
Accounts receivable, less allowance
(2006 - $12,979; 2005 - $13,782)		163,160			174,017
Inventories:
Finished products		65,904			67,973
Material and work in process		18,703			16,695

		84,607			84,668
Deferred income tax assets - Note 11		34,128			38,604
Prepaid expenses and other current assets		19,004			21,356

Total Current Assets		427,099			475,866
Property, Plant and Equipment, on the basis of cost:
Land		33,850			27,432
Buildings and improvements		222,361			170,103
Machinery and equipment		356,199			357,879
Construction and equipment installation in progress		20,983			28,690

		633,393			584,104
Less allowances for depreciation and amortization		(379,397	)		(374,464	)

		253,996			209,640
Goodwill		22,903			18,587
Intangible assets, less accumulated amortization
(2006 - $4,845; 2005 - $3,619)		17,196			14,362
Other assets		31,754			36,582

Total Assets	$	752,948		$	755,037

See notes to consolidated financial statements.

Bandag, Incorporated
Consolidated Balance Sheets (continued)

	December 31
In thousands	2006			2005
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable	$	38,839		$	45,794
Accrued employee compensation and benefits		32,791			33,695
Accrued marketing expenses		19,433			24,914
Other accrued expenses		32,986			35,523
Dividends payable		6,631			6,515
Income taxes payable		1,611			2,477
Current portion of debt and other obligations		14,600			15,351

Total Current Liabilities		146,891			164,269
Long-term debt and other obligations - Note 6		22,964			24,061
Deferred income tax liabilities		5,838			4,771
Minority interest		1,750			2,779
Shareholders' Equity - Note 14
Common Stock; $1.00 par value; authorized 21,500,000 shares;
Issued and outstanding - 9,066,683 shares in 2006; 9,129,060 shares in 2005		9,067			9,129
Class A Common Stock; $1.00 par value; authorized 50,000,000 shares;
Issued and outstanding - 9,517,117 shares in 2006; 9,388,786 shares in 2005		9,517			9,389
Class B Common Stock; $1.00 par value; authorized 8,500,000 shares;
Issued and outstanding - 916,910 shares in 2006, 917,563 shares in 2005		917			918
Additional paid-in capital		47,670			37,191
Retained earnings		515,883			529,372
Accumulated other comprehensive loss:
Minimum pension asset (liability)		2,321			(1,019	)
Foreign currency translation adjustment		(9,870	)		(25,823	)

		(7,549	)		(26,842	)

Total Shareholders' Equity		575,505			559,157

Total Liabilities and Shareholders' Equity	$	752,948		$	755,037

See notes to consolidated financial statements.

Bandag, Incorporated
Consolidated Statements of Earnings

	Year Ended December 31
In thousands, except per share data	2006			2005			2004
Income
Net sales of products	$	844,026		$	812,196		$	781,031
Net sales of services		129,544			102,444			83,312
Other		10,540			6,299			12,305

		984,110			920,939			876,648
Cost and Expenses
Cost of products sold		583,542			537,825			493,925
Cost of services sold		78,113			60,608			50,031
Engineering, selling, administrative and other expenses		252,842			252,191			250,683
Restructuring		19,762			3,100			--

		934,259			853,724			794,639
Income from Operations		49,851			67,215			82,009
Interest income		7,971			8,090			4,883
Interest expense		(1,433	)		(1,951	)		(1,990	)

Earnings Before Income Taxes, Minority Interest and
Discontinued Operations		56,389			73,354			84,902
Income taxes - Note 11		20,229			22,954			17,648
Minority interest		(396	)		921			374

Earnings from Continuing Operations		36,556			49,479			66,880
Net Loss on Discontinued Operations		(16,604	)		--			--

Net Earnings	$	19,952		$	49,479		$	66,880

Net Earnings Per Share - Note 12
Basic Earnings Per Share	$	1.89		$	2.55		$	3.47
Net Loss on Discontinued Operations		(0.86	)		--			--

Net Earnings	$	1.03		$	2.55		$	3.47

Diluted Earnings Per Share	$	1.87		$	2.52		$	3.39
Net Loss on Discontinued Operations		(0.85	)		--			--

Net Earnings	$	1.02		$	2.52		$	3.39

See notes to consolidated financial statements.

Bandag, Incorporated
Consolidated Statements of Cash Flows

	Year Ended December 31
In thousands	2006			2005			2004
Operating Activities
Net earnings	$	19,952		$	49,479		$	66,880
Adjustments to reconcile net earnings to net cash provided by operating activities:
Non-cash translation adjustment due to sale of South Africa		14,212			--			--
Depreciation expense		26,877			26,302			27,182
Change in deferred income taxes		750			(2,590	)		(89	)
Stock compensation expense, net of forfeitures		1,562			2,690			2,656
Other		8,940			5,100			4,325
Change in operating assets and liabilities, net of effects from
acquisitions and divestitures of businesses:
Accounts receivable		9,753			(18,452	)		7,426
Inventories		(793	)		(12,892	)		(6,304	)
Prepaid expenses and other accrued expenses		7,422			(3,896	)		(9,994	)
Accounts payable and other accrued expenses		(6,422	)		11,954			15,705
Income taxes payable		(676	)		(712	)		(12,702	)

Net Cash Provided by Operating Activities		81,577			56,983			95,085
Investing Activities
Additions to property, plant and equipment		(77,444	)		(65,647	)		(45,150	)
Proceeds from dispositions of property, plant and equipment		3,380			2,219			5,920
Purchases of investments		(704,500	)		(1,163,465	)		(1,116,990	)
Maturities of investments		684,350			1,239,430			1,070,525
Payments for acquisitions of businesses		(8,094	)		(2,978	)		(73,488	)
Proceeds from divestitures of businesses		460			2,251			15,255
Proceeds from sale of tire and wheel assets		--			--			34,023

Net Cash Provided by (Used in) Investing Activities		(101,848	)		11,810			(109,905	)
Financing Activities
Principal payments on short-term notes payable and long-term obligations		(12,551	)		(16,938	)		(7,368	)
Proceeds from short-term notes payable		5,487			6,645			--
Cash dividends		(26,053	)		(25,774	)		(25,164	)
Purchases of Common, Class A and Class B Stock		(8,076	)		(8,053	)		(2,844	)
Stock Options Exercised		8,027			2,235			4,154
Excess tax benefits from share-based compensation expense		380			--			--

Net Cash Used in Financing Activities		(32,786	)		(41,885	)		(31,222	)
Effect of exchange rate changes on cash and cash equivalents		1,886			3,517			1,554

Increase (Decrease) in Cash and Cash Equivalents		(51,171	)		30,425			(44,488	)
Cash and cash equivalents at beginning of year		97,071			66,646			111,134

Cash and Cash Equivalents at End of Year	$	45,900		$	97,071		$	66,646

See notes to consolidated financial statements.

Bandag, Incorporated
Consolidated Statements of Changes in Shareholders’ Equity

In thousands, except share data	Common Stock Issued and Outstanding						Class A Common Stock Issued and Outstanding						Class B Common Stock Issued and Outstanding					Additional Paid-In			Retained			Accumulated Other Compre- hensive			Compre- hensive
	Shares			Amount			Shares			Amount			Shares			Amount		Capital			Earnings			Loss			Income
Balance at December 31, 2003		9,099,745		$	9,100			9,249,756		$	9,250			918,688		$	919	$	17,903		$	474,257		$	(37,594	)
Net earnings for the year																						66,880					$	66,880
Other comprehensive income, -
adjustment for foreign
currency translation																									7,837			7,837
Other comprehensive income,
net of tax of $208 -
adjustment for minimum
pension liability																									106			106

Comprehensive income for the year																											$	74,823


Cash dividends - $1.305 per share																						(25,322	)

Conversion of Class B Common
Stock to Common Stock - Note 14		97												(97	)
Forfeitures of Common Stock
and Class A Common Stock
under Restricted Stock
Grant Plan - Note 14		(950	)		(1	)		(950	)		(1	)							(66	)
Forfeitures of Class A Common
Stock under Stock Award
Plan - Note 14								(149	)										(1	)
Class A Common Stock issued
under Stock Award Plan,
including tax benefit of
$295 - Note 14								47,378			47								930
Common Stock and Class A
Common Stock issued under
Stock Award Program
Plan - Note 15		21,319			21			21,773			22								1,945
Restricted Stock Units and
Stock Appreciation Rights
issued under Stock Grant
& Awards Plan - Note 14																			36
Purchases of Common Stock and
Class A Common Stock		(2,999	)		(3	)		(71,766	)		(72	)							(105	)		(2,663	)
Stock options exercised under
Stock Award Plan, including
tax benefit of $799 -
Note 14								170,016			170								6,051
Stock option expense																			2,641

Balance at December 31, 2004		9,117,212		$	9,117			9,416,058		$	9,416			918,591		$	919	$	29,334		$	513,152		$	(29,651	)

See notes to consolidated financial statements

Bandag, Incorporated
Consolidated Statements of Changes in Shareholders’ Equity (continued)

In thousands, except share data	Common Stock Issued and Outstanding						Class A Common Stock Issued and Outstanding						Class B Common Stock Issued and Outstanding						Additional Paid-In			Retained			Accumulated Other Compre- hensive			Compre- hensive
	Shares			Amount			Shares			Amount			Shares			Amount			Capital			Earnings			Loss			Income
Balance at December 31, 2004		9,117,212		$	9,117			9,416,058		$	9,416			918,591		$	919		$	29,334		$	513,152		$	(29,651	)
Net earnings for the year																							49,479						$49,479
Other comprehensive income,
net of tax of $2,170-
adjustment for foreign
currency translation																										3,333			3,333
Other comprehensive income,
net of tax of $401-
adjustment for minimum
pension liability																										(524	)		(524	)

Comprehensive income for the year																												$	52,288

Cash dividends - $1.325 per share																							(25,871	)
Conversion of Class B Common
Stock to Common Stock - Note 14		1,028			1									(1,028	)		(1	)
Forfeitures of Common Stock
and Class A Common Stock
under Restricted Stock
Grant Plan - Note 14		(855	)		(1	)		(855	)		(1	)								(67	)
Forfeitures of Class A Common
Stock under Stock Award
Plan - Note 14								(118	)											(3	)
Forfeitures of Class A Common
Stock under Stock Grant &
Awards Plan - Note 14								(560	)		(1	)								(4	)
Class A Common Stock issued
under Stock Award Plan,
including tax of $33 - Note 14								23,253			23									1,068
Class A Common Stock issued
under Stock Grant & Awards
Plan - Note 14								41,156			41									455
Common Stock and Class A
Common Stock issued under
Stock Award Program
Plan - Note 15		18,521			19			20,034			20									1,620
Restricted Stock Units and
Stock Appreciation Rights
issued under Stock Grant
& Awards Plan - Note 14																				78
Purchases of Common Stock and
Class A Common Stock		(6,846	)		(7	)		(203,597	)		(203	)								(455	)		(7,388	)
Stock options exercised under
Stock Award Plan, including
tax benefit of $356 - Note 14								93,415			94									2,498
Stock option expense																				2,667

Balance at December 31, 2005		9,129,060		$	9,129			9,388,786		$	9,389			917,563		$	918		$	37,191		$	529,372		$	(26,842	)

See notes to consolidated financial statements.

Bandag, Incorporated
Consolidated Statements of Changes in Shareholders’ Equity (continued)

In thousands, except share data	Common Stock Issued and Outstanding						Class A Common Stock Issued and Outstanding						Class B Common Stock Issued and Outstanding						Additional Paid-In			Retained			Accumulated Other Compre- hensive			Compre- hensive
	Shares			Amount			Shares			Amount			Shares			Amount			Capital			Earnings			Loss			Income
Balance at December 31, 2005		9,129,060		$	9,129			9,388,786		$	9,389			917,563		$	918		$	37,191		$	529,372		$	(26,842	)
Net earnings for the year																							19,952					$	19,952
Other comprehensive income,
net of tax of $3,184-
adjustment for foreign
currency translation																										15,953			15,953
Other comprehensive income,
net of tax of $1,398 -
adjustment for minimum
pension liability																										3,340			(2,096	)

Comprehensive income for the year																												$	33,809


Cash dividends - $1.345 per share																							(26,167	)

Conversion of Class B Common
Stock to Common Stock - Note 14		653			1									(653	)		(1	)
Forfeitures of Common Stock
and Class A Common Stock
under Restricted Stock
Grant Plan - Note 14		(785	)		(1	)		(855	)		(1	)								(35	)
Forfeitures of Class A Common
Stock under Stock Award
Plan - Note 14								(9,493	)		(9	)								9
Forfeitures of Class A Common
Stock under Stock Grant &
Awards Plan - Note 14								(7,820	)		(8	)								8
Class A Common Stock issued
under Stock Grant & Awards
Plan, including tax of $19
- Note 14								8,290			8									1,212
Common Stock and Class A
Common Stock issued under
Stock Award Program
Plan - Note 15		4,312			4			4,312			4									326
Restricted Stock Units and
Stock Appreciation Rights
expense under Stock Grant
& Awards Plan - Note 14																				22
Purchases of Common Stock and
Class A Common Stock		(66,557	)		(66	)		(170,895	)		(171	)								(565	)		(7,274	)
Stock options exercised under
Stock Award Plan,
including tax benefit of
$214 - Note 14								304,792			305									7,935
Stock option expense																				1,266
Performance unit award expense																				301

Balance at December 31, 2006		9,066,683		$	9,067			9,517,117		$	9,517			916,910		$	917		$	47,670		$	515,883		$	(7,549	)

See notes to consolidated financial statements.

Bandag, Incorporated
Notes to Consolidated Financial Statements

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation:

The consolidated financial statements include the accounts and transactions of all subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. The Company’s foreign subsidiaries outside North America have November 30 fiscal year-ends to facilitate inclusion of their financial statements in the December 31 consolidated financial statements.

Use of Estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash Equivalents:

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate their fair value.

Accounts Receivable and Concentrations of Credit Risk:

Concentrations of credit risk with respect to accounts receivable are limited due to the number of customers the Company has and their geographic dispersion. The Company maintains close working relationships with these customers and performs ongoing credit evaluations of their financial condition. No one customer is large enough to pose a significant financial risk to the Company. The Company maintains an allowance for losses based upon the expected collectibility of accounts receivable. Credit losses have been within management’s expectations.

Accounts Receivable and Allowance for Doubtful Accounts:

The Company carries its accounts receivable at their face amounts less an allowance for doubtful accounts. On a regular basis, the Company evaluates its accounts receivable and establishes the allowance for doubtful accounts based on a combination of specific customer circumstances as well as credit conditions and based on a history of write-offs and collections. A receivable is considered past due if payments have not been received within agreed upon invoice terms. Accounts receivable are charged to the allowance when the Company determines the receivable will not be collected. The Company also maintains notes receivable with certain customers. Interest may be charged on notes and is recognized when paid by the debtor; however, interest is not charged on accounts receivables.

Deferred Taxes:

Deferred taxes on the unremitted earnings of foreign subsidiaries are provided under the assumption that all profits of the foreign subsidiaries will be repatriated to the United States and all foreign taxes paid will be available to offset United States taxes. In addition, any deferred tax asset is reviewed annually to determine the probability of realizing the asset. If it is determined unlikely that the asset will be fully realized in the future, a valuation allowance is established against the asset. Refer to Note 11 of the consolidated financial statements for further details.

Inventories:

Inventories are valued at the lower of cost or market. Inventories held by the Traditional Business segment consist mainly of synthetic rubber, natural rubber and material and equipment used to retread tires. These inventories are accounted for under the last in, first out (LIFO) method, except for those inventories carried by the Brazil and Mexico operations which are accounted for under the first in, first out (FIFO) method.

Inventories held by the TDS segment consist primarily of new and retreaded tires. New tires represent approximately 67% of the total TDS inventory with retread tires comprising a majority of the difference. Inventories held by the Vehicle Services segment consist primarily of lubricants and supplies and tires. TDS and Vehicle Services inventories are accounted for under the FIFO method. The FIFO method is commonly used within the retail tire industry and Management believes the use of FIFO allows better comparability to other businesses in the industry.

Bandag, Incorporated
Notes to Consolidated Financial Statements

Approximately 50% and 52% of year-end inventory amounts at December 31, 2006 and 2005, respectively, were determined by the LIFO method. The remainder of year-end inventory amounts are determined by the FIFO method. The excess of current cost over the amount stated for inventories valued by the LIFO method amounted to approximately $31,697,000 and $26,046,000 at December 31, 2006 and 2005, respectively. During 2004, inventory quantities were reduced which resulted in a liquidation of LIFO inventory layers carried at lower costs which prevailed in prior years. The effect of the liquidation was to decrease cost of goods sold approximately $1,766,000 for the year ended December 31, 2004.

The Company has commitments to purchase raw materials in 2007 of $161,044,000.

Property, Plant, and Equipment:

Provisions for depreciation of plant and equipment is computed using straight-line and declining-balance methods, over the following estimated useful lives:


Buildings	5 to 50 years
Building Improvements	3 to 40 years
Machinery and Equipment	3 to 15 years

Depreciation expense was approximately $26,877,000, $26,302,000 and $27,182,000 in 2006, 2005 and 2004, respectively.

Goodwill and Other Intangible Assets:

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and indefinite-lived intangible assets, while not amortized, are reviewed at least annually for impairment using the discounted cash flow method. Separable intangible assets that have finite useful lives are amortized over their useful lives using the straight-line method over 3 to 5 years. An impaired intangible asset would be written down to fair value, using the discounted cash flow method. Intangible amortization expense was approximately $1,226,000, $840,000 and $1,018,000 in 2006, 2005 and 2004, respectively. Amortization expense is estimated to be $831,000, $340,000, $202,000, $202,000 and $202,000 for the years 2007, 2008, 2009, 2010 and 2011, respectively.

Foreign Currency Translation:

Assets and liabilities of foreign subsidiaries are translated at the year-end exchange rate and items of income and expense are translated at the average exchange rate for the year. Exchange gains and losses arising from transactions denominated in a currency other than the functional currency of the foreign subsidiary and translation adjustments in countries with highly inflationary economies or in which operations are directly and integrally linked to the Company’s United States operations are included in income. Net foreign exchange gains, which are included in engineering, selling, administrative and other expenses in the Consolidated Statements of Earnings, were $137,000, in 2006. Net foreign exchange losses, which are included in engineering, selling, administrative and other expenses in the Consolidated Statements of Earnings, were $1,979,000 and $1,381,000 in 2005 and 2004.

Long-Lived Assets:

In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” when indicators of impairment are present, the Company evaluates the carrying value of property, plant, and equipment and finite lived intangibles in relation to the operating performance and future undiscounted cash flows of the underlying businesses. The Company adjusts the net book value of the underlying assets to fair value if the sum of the expected future cash flows is less than book value.

Bandag, Incorporated
Notes to Consolidated Financial Statements

Research and Development:

Expenditures for research and development, which are expensed as incurred, approximated $6,737,000, $7,353,000 and $7,063,000 in 2006, 2005, and 2004, respectively.

Advertising:

The Company expenses all advertising costs in the year incurred. Advertising expense was $6,052,000, $6,596,000 and $3,668,000 in 2006, 2005, and 2004, respectively.

Revenue Recognition:

Sales of tread rubber, equipment, new tires and retread tires and other tire related products are recorded when title and all risk of ownership are transferred to the dealer or customer upon receipt of goods at the dealer or customer’s place of business. Service revenue is recognized upon completion of the service. Revenue related to the Company’s tire management outsourcing services is recognized on a per mile basis determined on the number of tire miles traveled by the customers’ truck fleets in the month of usage. Revenue related to the sale of computer hardware or software is recognized when it has been installed for the customer.

Shipping and Handling Costs:

Shipping and handling costs are included as part of cost of products sold in the Consolidated Statement of Earnings.

Marketing Programs:

Under the DMR Program, the Company provides financial assistance primarily in the form of DMR promissory notes from the dealer to Bandag. The proceeds from the promissory notes can only be used by the dealer toward the acquisition of equipment (including equipment sold by the Company), service vehicles, facility expansions and other items aligned with Company goals. The notes generally have a term of up to five years. However, if the dealer achieves a business objective, typically purchasing a specified amount of tread rubber each year, then the Company forgives either part or all of the principal and interest for that year. The Company records a reduction in sales for the costs of the program as financial assistance is provided. The DMR reserve at December 31, 2006, 2005 and 2004 was $13,146,000, $13,622,000 and $14,189,000, respectively. In 2006, 2005 and 2004, DMR costs of $10,004,000, $9,236,000 and $7,830,000, respectively, were recorded as a reduction of sales. For those DMR agreements that do not include notes, the Company records expense and a corresponding liability, or discloses such agreements in accordance with SFAS No. 5, “Accounting for Contingencies.”

National Account Business:

The Company enters into contracts to supply retreaded tires and other tire-related services through its network of franchised dealers to large national and regional customers in the North American trucking and transportation industry. The Company provides various forms of financial incentives to its dealers to continue the supply of retreaded tires and services on these accounts. In 2006, 2005, and 2004, fleet subsidy expenses of $36,987,000, $30,800,000 and $21,288,000, respectively, were recorded as a reduction of sales.

Derivative Instruments and Hedging Activities:

The Company recognizes all derivative instruments as either assets or liabilities in the Consolidated Balance Sheets at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

Bandag, Incorporated
Notes to Consolidated Financial Statements

The Company primarily uses foreign currency forward exchange contracts and foreign currency option contracts to reduce its exposure to foreign currency risk from its forecasted revenue denominated in foreign currencies. When the dollar strengthens significantly against the foreign currencies, the decline in the value of future foreign currency revenue is offset by gains in the value of the forward contract. Conversely, when the dollar weakens, the increase in the value of future foreign currency cash flows is offset by losses in the value of the forward contracts. The Company does not actively trade such instruments, nor does it enter into such agreements for speculative purposes.

The fair value of the derivative instruments was zero at December 31, 2006 and 2005. Changes in the fair values of these instruments are reflected in engineering, selling, administrative and other expenses in the Consolidated Statements of Earnings because the Company has not designated these instruments as accounting hedges.

Accounting for Stock-Based Compensation:

Effective January 1, 2002, the Company adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosures” (the Statement). Under the modified prospective method of adoption selected by the Company under the provisions of the Statement, compensation cost is the same as that which would have been recognized had the recognition provisions of the Statement been applied from its original effective date in 1994. Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004) (SFAS 123(R)), “Share-Based Payment” using the modified prospective method.

The Company has historically expensed stock-based compensation over the explicit service period up to the date of retirement. Upon adoption of SFAS 123(R) the Company recognized compensation cost over the period through the date that the employee is eligible to retire.

SFAS 123(R) also requires that the benefits of tax deductions in excess of compensation amounts recognized for book purposes, be reported as a financing cash flow rather than an operating cash flow as required previously. This change in presentation in the accompanying Consolidated Statement of Cash Flows has reduced net operating cash flows and increased net financing cash flows by $380,000 for 2006.

The Company’s Board of Directors adopted the Bandag, Incorporated Stock Award Plan in 1999 (the Plan) and the Bandag, Incorporated 2004 Stock Grant and Awards Plan in 2004 (the 2004 Plan). No additional grants may be made under plans other than the 2004 Plan. Under the terms of the 2004 Plan, the Company may award to certain eligible employees and directors stock options, stock appreciation rights, performance shares, performance units, restricted stock, restricted stock units, dividend equivalent units and incentive awards, whether granted alone or in addition to, in tandem with, or in substitution for any other award. Up to 2,000,000 shares of Class A Common Stock is authorized for issuance under the 2004 Plan and as of December 31, 2006, 1,790,373 shares were available for issuance under the 2004 Plan.

The Company recognized compensation expense related to its stock-based compensation plans of $3,188,661, $4,292,077 and $3,585,506 in 2006, 2005 and 2004, respectively.

Bandag, Incorporated
Notes to Consolidated Financial Statements

A summary of the status of the Company’s option activity under the Plan and 2004 Plan is presented below (aggregate intrinsic value in thousands):

	Class A Common Shares			Weighted- Average Exercise Price		Aggregate Intrinsic Value
Outstanding, January 1, 2004		1,464,640		$	26.47
Granted		152,510		$	44.73
Exercised		(169,238	)	$	24.46
Forfeited		(19,861	)	$	30.20

Outstanding, December 31, 2004		1,428,051		$	28.61
Granted		108,720		$	41.02
Exercised		(93,031	)	$	23.91
Forfeited		(6,615	)	$	38.38

Outstanding, December 31, 2005		1,437,125		$	29.80
Granted		62,160		$	35.75
Exercised		(306,492	)	$	26.32
Forfeited		(87,064	)	$	36.59

Outstanding, December 31, 2006		1,105,729		$	30.57	$	21,606

Exercisable, December 31, 2006		886,794		$	29.11	$	18,627

The following summarizes information about stock options outstanding under the Plan and the 2004 Plan at December 31, 2006:

	Options Outstanding			Options Exercisable
Range of Exercise Prices	Class A Common Shares	Average Remaining Contractual Life	Weighted- Average Exercise Price	Class A Common Shares	Weighted- Average Exercise Price
$18.99 - $23.74	159,610	3.2 years	$21.09	159,610	$21.09
$23.74 - $28.48	442,290	5.3 years	$26.27	373,030	$26.01
$28.48 - $33.23	196,209	4.8 years	$32.53	196,209	$32.53
$33.23 - $37.98	101,640	5.7 years	$34.89	57,060	$34.21
$37.98 - $42.72	88,120	7.8 years	$41.04	32,875	$41.17
$42.72 - $47.47	117,860	6.6 years	$44.73	68,010	$44.90

$18.99 - $47.47	1,105,729	5.3 years	$30.57	886,794	$29.11

The fair value of each option granted is estimated on the grant date using the Black-Scholes model. The following weighted-average assumptions were made in estimating the fair value:

	2006	2005	2004
Dividend yield	3.6%	3.7%	3.7%
Expected volatility	36.5%	29.4%	33.6%
Risk-free interest rate	4.3%	4.2%	3.8%
Expected lives	7.7 years	7.7 years	7.7 years

Bandag, Incorporated
Notes to Consolidated Financial Statements

The weighted-average fair value of options granted during 2006, 2005 and 2004 was $10.97, $10.29 and $11.41 per option, respectively. The number of options exercisable was 886,794, 928,717 and 681,382 at December 31, 2006, 2005, and 2004, respectively. The weighted-average remaining contractual life of options exercisable was 4.7 years at December 31, 2006.

Bandag accounts for restricted stock at historical cost which equals its fair market value at the date of grant. A summary of the status of the Company’s restricted stock activity under the Plan and the 2004 Plan is presented below:

	Class A Common Shares
Non-vested, January 1, 2006	124,277
Granted	8,290
Vested	(22,096)
Forfeited	(17,313)

Non-vested, December 31, 2006	93,158

Restricted stock awards for an aggregate 93,158 shares of Class A Common Stock were outstanding at December 31, 2006, and vest as follows: 36,914 in 2007, 49,268 in 2008 and 6,976 in 2009. The weighted-average fair value of restricted stock granted during 2006, 2005 and 2004 was $35.69, $40.99 and $44.69 per share, respectively. The total fair value of restricted stock that vested during 2006, 2005 and 2004 was $663,000, $107,000 and $252,000, respectively.

New Accounting Standards:

Bandag, Incorporated
Notes to Consolidated Financial Statements

Reclassification:

Certain prior year amounts have been reclassified to conform with the current year presentation.

Note 2. Acquisitions

During 2005, the Company’s TDS segment acquired one retread plant and five commercial and retail outlets for $2,978,000. During 2004, the Company’s TDS segment acquired seven commercial and retail outlets and two retread plants for $4,163,000.

Certain supplemental non-cash information related to the Company’s 2006 and 2005 acquisitions are as follows (in thousands):

	2006	2005

Assets acquired	$8,094	$ 3,028
Less liabilities	--	(50)

Cash paid for acquisitions	8,094	2,978

Note 3. Divestitures

During 2004, the Company’s TDS segment sold 19 locations with a net carrying value of $18,496,000 for cash of $13,407,000 and assumed liabilities of $4,251,000. The assets of these locations consisted primarily of inventory and property, plant and equipment. The divestitures resulted in a loss before income taxes and minority interest of $838,000 which was recorded in engineering, selling, administrative and other expenses in the Consolidated Statements of Earnings. During 2004, TDS also closed two locations. These divested and closed locations contributed $60,504,000 to net sales and $418,000 of losses to earnings before income taxes, minority interest and discontinued operations for the year ended December 31, 2004.

The divested and closed locations had net sales and loss before income taxes and minority interest as follows (in thousands):


	2004
Net sales	$ 60,504
Loss before income taxes and minority interest	$ (606)

During 2004, the Company sold a portion of the assets of Quality Design Systems, Inc. for a gain of approximately $1,937,000 which is included in other income in the Consolidated Statement of Earnings.

Bandag, Incorporated
Notes to Consolidated Financial Statements

Note 4. Restructuring Costs and Other

Note 5. Investments

All marketable securities are classified as available-for-sale. Realized gains and losses from the sales of marketable securities are based on the specific identification method. Interest on securities classified as available-for-sale is included in interest income.

The following is a summary of securities available-for-sale:


In thousands	Cost		Estimated Fair Value
December 31, 2006
Obligations of states and political subdivisions	$	80,300	$	80,300
Corporate debt		--		--

	$	80,300	$	80,300

December 31, 2005
Obligations of states and political subdivisions	$	60,150	$	60,150
Corporate debt		13,048		13,048

	$	73,198	$	73,198

Bandag, Incorporated
Notes to Consolidated Financial Statements

The contractual maturities of debt securities at December 31, 2006 are as follows:


In thousands	Estimated Fair Value
Due after one through five years	$	2,000
Due after ten years		78,300

Debt securities	$	80,300

Proceeds from the sales of available-for-sale securities were $684,350,000 in 2006, $1,239,430,000 in 2005 and $1,070,525,000 in 2004. Realized gains and losses and unrealized gains and losses were not material in the years 2006, 2005 and 2004. At December 31, 2005, securities available-for-sale include $13,048,000 reported as cash equivalents.

Note 6. Financing Arrangements

The following is a summary of the Company’s debt and other obligations as of December 31:


In thousands	Interest Rates			2006			2005
Senior Unsecured Notes Payable, maturing 2007		6.50	%	$	5,714		$	11,429

Total debt					5,714			11,429
Other obligations					31,850			27,983

Total debt and other obligations					37,564			39,412
Current portion of debt and other obligations					(14,600	)		(15,351	)

Long-term debt and other obligations				$	22,964		$	24,061

The aggregate amount of scheduled annual maturities of long-term debt and other obligations is as follows:

Scheduled maturities, in thousands
2007	$	14,600
2008		2,774
2009		2,449
2010		1,834
2011		898
Thereafter		15,009

Other obligations consist primarily of a pension liability, postretirement medical liability and miscellaneous other liabilities.

Cash payments for interest on debt were $1,539,000, $1,912,000 and $2,057,000 in 2006, 2005, and 2004, respectively.

The fair values of the Company’s financing arrangements were estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. At December 31, 2006 and 2005, the fair value of the Company’s outstanding debt was approximately $5,781,000 and $11,686,000, respectively. Changes in the market value of the Company’s debt does not affect the reported results of operations unless the Company is retiring such obligations prior to maturity.

At December 31, 2006, the Company had uncommitted and committed unused lines of credit arrangements totaling $107,360,000. These arrangements are available to the Company or certain of its international subsidiaries through various domestic and international banks at various interest rates and expiration dates.

Bandag, Incorporated
Notes to Consolidated Financial Statements

Note 7. Goodwill and Indefinite-Lived Intangible Assets

Goodwill and indefinite-lived intangible assets are reviewed at least annually for impairment. As of December 31, 2006 and 2005 the Company had goodwill in the amount of $22,903,000 and $18,587,000, respectively. As of December 31, 2006 and 2005 the Company had trade name assets in the amount of $12,400,000. Separable intangible assets that have finite lives continue to be amortized over their useful lives.

As of December 31, 2006 and 2005, the Company tested for impairment of goodwill and indefinite-lived intangibles using discounted cash flow models. As a result of these tests, the Company was not required to recognize any impairment.

Note 8. Other Income

Other income includes gain on sale of assets, lease income, royalties and other miscellaneous items. In 2006 other income includes $2,900,000 for legal settlements with raw material suppliers and $845,000 for the sale of the Company’s joint venture in India. In 2004 a gain on sale of assets was recorded of approximately $1,937,000 for the sale of certain assets of QDS and approximately $3,400,000 for the sale of the Chino, California facility.

Note 9. Impairment of Long-Lived Assets

Long-lived assets related to the Company’s North American and Speedco business units were determined to be impaired in 2005 and charges of $1,604,000 and $365,000, respectively, were recorded in engineering, selling, administrative and other expenses. The fixed assets were determined to be impaired due to an adverse change in the manner in which the assets were to be used and were written down to fair value based on appraisals.

Note 10. Leases

Certain equipment and facilities are rented under non-cancelable and cancelable operating leases. Total rental expense under operating leases was $12,100,000, $11,245,000 and $11,679,000 for the years ended December 31, 2006, 2005, and 2004, respectively. At December 31, 2006, future minimum lease payments under non-cancelable operating leases having initial lease terms in excess of one year are: $10,078,000 in 2007, $7,757,000 in 2008, $6,012,000 in 2009, $4,942,000 in 2010, $3,916,000 in 2011, and $17,304,000 in the aggregate for all years after 2011.

Bandag, Incorporated
Notes to Consolidated Financial Statements

Note 11. Income Taxes

Significant components of the Company’s deferred tax assets and liabilities reflecting the net tax effects of temporary differences are summarized as follows:

	December 31
In thousands	2006			2005
Deferred tax assets:
Marketing programs	$	12,265		$	14,693
Excess foreign tax credits upon repatriation of
unremitted earnings		6,582			8,735
Employee benefits		7,818			8,088
Insurance and legal reserves		5,473			7,310
Foreign tax credits(1)		5,239			6,605
Accounts receivable valuation allowances		2,557			2,650
Other nondeductible reserves		2,319			1,939
Obsolescence and valuation reserves		931			762
Plant and equipment reserves		263			153
Other accruals		9,702			11,629

Total deferred tax assets		53,149			62,564

Deferred tax liabilities:
Basis difference in fixed assets		8,744			9,034
Excess pension funding		4,978			4,551
Unremitted earnings of foreign subsidiaries		4,380			6,240
Other liabilities		175			171

		18,277			19,996
Valuation allowance((2))		6,582			8,735

Total deferred tax liabilities		24,859			28,731

Net deferred tax assets	$	28,290		$	33,833

Net current deferred tax assets	$	34,128		$	38,604
Net non-current deferred tax liabilities		(5,838	)		(4,771	)

Net deferred tax assets	$	28,290		$	33,833

(1)

Majority expire in 2014.

(2)

If the Company repatriated all of its foreign earnings, the Company would have excess foreign tax credits. A valuation allowance was recorded to recognize the potential inability to utilize these credits.

The components of earnings before income taxes and minority interest are summarized as follows:

	Year Ended December 31
In thousands	2006		2005		2004
Domestic	$	49,752	$	56,634	$	67,956
Foreign		6,637		16,720		16,946

Earnings before income taxes and minority interest and discontinued operations	$	56,389	$	73,354	$	84,902

Bandag, Incorporated
Notes to Consolidated Financial Statements

Significant components of the provision for income tax expense (credit) are summarized as follows:

	Year Ended December 31
In thousands	2006			2005			2004
Current:
Federal	$	16,608		$	18,690		$	8,227
State		1,575			3,523			2,467
Foreign		2,617			6,554			5,847
Deferred:
Federal		(1,657	)		(4,249	)		954
Foreign		1,086			(1,564	)		153

Income taxes	$	20,229		$	22,954		$	17,648

A reconciliation of income tax at the statutory rate to the Company’s effective rate is as follows:

	Year Ended December 31
	2006			2005			2004
Computed at the expected statutory rate		35.0	%		35.0	%		35.0	%
State income tax - net of federal tax benefit		1.9			3.1			1.5
Deferred tax on unremitted earnings of foreign subsidiaries
and foreign tax rate differentials		1.9			(3.0	)		(4.2	)
Audit settlement and prior year accrual changes(1)		0.3			0.1			(9.9	)
Research and development credit		--			(0.8	)		(0.9	)
Net operating loss benefits not utilized and capital loss carryback		(1.8	)		--			--
Tax exempt interest		(1.5	)		(1.5	)		(0.6	)
Section 199, manufacturing deduction		(0.7	)		(0.9	)		--
Other		0.8			(0.7	)		(0.1	)

Income tax at the effective rate		35.9	%		31.3	%		20.8	%

(1) Decrease in 2004 due to $7,200,000 for the resolution and reassessment of certain tax matters in 2004.

Income taxes paid amounted to $17,906,000, $28,278,000 and $27,303,000 in 2006, 2005, and 2004, respectively.

Bandag, Incorporated
Notes to Consolidated Financial Statements

Note 12. Earnings Per Share

Earnings per share amounts are based on the weighted-average number of shares of Common Stock, Class A Common Stock, Class B Common Stock and dilutive potential common shares (restricted stock and stock options) outstanding during the year.

The following table sets forth the computation of basic and diluted earnings per share:

	Year Ended December 31
In thousands, except per share data	2006			2005		2004
Numerator:
Earnings from continuing operations	$	36,556		$	49,479	$	66,880
Net loss on discontinued operations		(16,604	)		--		--

Net earnings	$	19,952		$	49,479	$	66,880

Denominator:
Weighted-average shares - Basic		19,342			19,393		19,293
Effect of dilutive:
Restricted stock		1			4		58
Stock options		193			274		356

		194			278		414
Weighted-average shares - Diluted		19,536			19,671		19,707

Basic earnings (loss) per share
Earnings from continuing operations	$	1.89		$	2.55	$	3.47
Net loss on discontinued operations		(0.86	)		--		--

Net earnings	$	1.03		$	2.55	$	3.47

Diluted earnings (loss) per share
Earnings from continuing operations	$	1.87		$	2.52	$	3.39
Net loss on discontinued operations		(0.85	)		--		--

Net earnings	$	1.02		$	2.52	$	3.39

Options to purchase 96,780, 253,812 and 143,660 shares of Class A Common Stock were outstanding during 2006, 2005 and 2004, respectively, but were not included in the computation of diluted earnings per share because the effect would have been antidilutive.

Bandag, Incorporated
Notes to Consolidated Financial Statements

Note 13. Operating Segment and Geographic Area Information

Description of Types of Products and Services:

The Company has three reportable operating segments: Traditional Business, TDS and Vehicle Services. Traditional Business manufactures precured tread rubber, equipment and supplies for retreading tires and operates on a worldwide basis. SFAS No. 131 requires segment information to be reported based on how management internally evaluates the operating performance of their business units. The operations of the Traditional Business segment are evaluated by worldwide geographic region. For segment reporting purposes, the Company’s operations located in the United States and Canada together with Open Road Technologies, are integrated and managed as one unit, which is referred to internally as “North America.” The Company’s operations located in Europe principally service those European countries, but also export to certain other countries in the Middle East and Northern and Central Africa. This collection of countries is under one management group and is referred to internally as “EMEA.” The Company’s exports from North America to markets in the Caribbean, Central America, South America and Asia, along with operations in Brazil, Mexico and Venezuela and royalties from licensees in Australia and South Africa, are combined under one management group referred to internally as “International.”

TDS operates franchised retreading locations and commercial, retail, and wholesale outlets in the western region of the United States for the sale and maintenance of new and retread tires to principally commercial and industrial customers.

Speedco, together with Truck Lube 1, acquired in the second quarter of 2006, are now combined into one segment, Vehicle Services. Speedco provides quick-service truck lubrication and routine tire services through company-owned on-highway locations in the United States. Truck Lube 1 is located in Florida and provides light truck maintenance.

Measurement of Segment Profit and Loss and Segment Assets:

The Company evaluates performance and allocates resources based primarily on profit or loss before interest and income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.

Intersegment and intrasegment sales and transfers are recorded at fair market value less a discount between geographic areas within the Traditional Business. Transactions between the Traditional Business and TDS and between the Traditional Business and Speedco are recorded at a value consistent with that to unaffiliated customers.

Other consists of corporate administrative expenses, net unrealized foreign exchange gains and losses on U.S. denominated investments, interest income and interest expense. Other assets are principally cash and cash equivalents, investments, corporate office and related equipment.

Bandag, Incorporated
Notes to Consolidated Financial Statements

Information concerning operations for the Company’s three reportable operating segments and different geographic areas follows:

	Traditional Business
	North America((2))							EMEA
In thousands	2006		2005		2004			2006			2005			2004
Sales by product
Retread products	$	407,786	$	401,930	$	355,305		$	83,742		$	86,057		$	85,997
New tires		--		--		--			--			--			--
Retread tires		--		--		--			--			--			--
Equipment		21,607		18,105		21,599			3,703			5,341			4,692
Services		--		--		--			--			--			--
Other		23,961		27,399		35,024			--			--			--

Net sales to unaffiliated customers(1)	$	453,354	$	447,434	$	411,928		$	87,445		$	91,398		$	90,689

Transfers	$	29,819	$	28,660	$	37,570		$	413		$	1,114		$	807
Gross profit	$	160,985	$	169,948	$	179,224		$	28,578		$	34,469		$	33,627
Depreciation expense		11,160		11,377		12,168			2,533			2,772			3,201
Restructuring expense		13,072		--		--			5,778			3,100			--
Corporate expense		--		--		--			--			--			--
Operating earnings (loss)	$	49,384	$	63,026	$	72,529		$	(6,880	)	$	(262	)	$	2,789
Interest revenue		--		--		--			--			--			--
Interest expense		--		--		--			--			--			--

Earnings (loss) before income taxes,
minority interest and
discontinued operations	$	49,384	$	63,026	$	72,529		$	(6,880	)	$	(262	)	$	2,789
Total assets at December 31	$	230,214	$	273,273	$	258,633		$	52,193		$	52,211		$	51,491
Expenditures for long-lived assets		6,687		15,073		12,245			1,478			2,572			2,035
Additions to (deductions from) long-
lived assets due to acquisitions
(divestitures)		--		--		(195	)		--			--			--
Fixed assets		50,141		56,927		51,930			8,651			9,205			11,014
Goodwill and intangible assets		2,323		2,958		2,224			--			--			--
Retained earnings		555,809		527,343		514,847			8,860			17,409			18,684

(1)	No customer accounted for 10% or more of the Company’s sales to unaffiliated customers in 2006, 2005 or 2004.

(2)	Export sales from North America were less than 10% of sales to unaffiliated customers in each of the years 2006, 2005 and 2004.

Bandag, Incorporated
Notes to Consolidated Financial Statements

	Traditional Business
	International						TDS
In thousands	2006		2005		2004		2006			2005			2004
Sales by product
Retread products	$	112,404	$	122,315	$	104,606	$	--		$	--		$	--
New tires		--		--		--		119,647			94,947			109,907
Retread tires		--		--		--		34,382			30,892			44,963
Equipment		1,887		2,263		1,260		--			--			--
Services		--		--		--		28,028			25,785			28,676
Other		--		--		--		22,682			16,898			17,249

Net sales to unaffiliated customers(1)	$	114,291	$	124,578	$	105,866	$	204,739		$	168,522		$	200,795

Transfers	$	10,459	$	7,768	$	8,626	$	92		$	272		$	839
Gross profit	$	33,718	$	39,719	$	36,506	$	54,276		$	46,589		$	50,674
Depreciation expense		3,195		3,471		3,953		3,058			3,422			3,736
Restructuring expense		912		--		--		--			--			--
Corporate expense		--		--		--		--			--			--
Operating earnings (loss)	$	11,568	$	14,821	$	14,886	$	11,719		$	6,584		$	1,506
Interest revenue		--		--		--		--			--			--
Interest expense		--		--		--		--			--			--

Earnings before income taxes,
minority interest and
discontinued operations	$	11,568	$	14,821	$	14,886	$	11,719		$	6,584		$	1,506
Total assets at December 31	$	64,732	$	60,760	$	53,042	$	63,092		$	63,869		$	55,478
Expenditures for long-lived assets		4,698		3,588		3,123		3,248			3,518			5,679
Additions to (deductions from) long-
lived assets due to acquisitions
(divestitures)		--		--		--		--			420			(8,171	)
Fixed assets		18,347		19,360		20,076		14,149			15,738			13,986
Goodwill and intangible assets		--		--		--		--			--			--
Retained earnings		39,532		59,852		58,904		(86,531	)		(75,953	)		(81,900	)

(1)	No customer accounted for 10% or more of the Company’s sales to unaffiliated customers in 2006, 2005 or 2004.

Bandag, Incorporated
Notes to Consolidated Financial Statements

	Vehicle Services⁽²⁾							Other⁽³⁾
In thousands	2006			2005		2004		2006			2005			2004
Sales by product
Retread products	$	--		$	--	$	--	$	--		$	--		$	--
New tires		8,491			4,118		327		--			--			--
Retread tires		924			366		22		--			--			--
Equipment		--			--		--		--			--			--
Services		101,516			76,659		54,636		--			--			--
Other		2,810			1,565		80		--			--			--

Net sales to unaffiliated customers(1)	$	113,741		$	82,708	$	55,065	$	--		$	--		$	--

Transfers		--			--		--		--			--			--
Gross profit	$	34,358		$	25,482	$	20,356	$	--		$	--		$	--
Depreciation expense		5,197			3,470		2,243		1,734			1,790			1,881
Restructuring expense		--			--		--		--			--			--
Corporate expense		--			--		--		13,693			15,745			14,069
Operating earnings (loss)	$	(512	)	$	581	$	6,249	$	(15,428	)	$	(17,535	)	$	(15,950	)
Interest revenue		--			--		--		7,971			8,090			4,883
Interest expense		--			--		--		(1,433	)		(1,951	)		(1,990	)

Earnings (loss) before income taxes,
minority interest and
discontinued operations	$	(512	)	$	581	$	6,249	$	(8,890	)	$	(11,396	)	$	(13,057	)
Total assets at December 31	$	210,485		$	143,148	$	104,147	$	132,232		$	161,776		$	207,936
Expenditures for long-lived assets		60,084			39,640		17,940		1,249			1,256			4,128
Additions to (deductions from) long-
lived assets due to acquisitions
(divestitures)		112			--		52,581		--			--			--
Fixed assets		157,437			104,116		68,278		5,271			4,294			4,734
Goodwill and intangible assets		37,776			29,991		30,230		--			--			--
Retained earnings		(1,787	)		721		2,617		--			--			--

(1)	No customer accounted for 10% or more of the Company’s sales to unaffiliated customers in 2006, 2005 and 2004.

(2)	Truck Lube 1 was acquired on April 1, 2006 and Speedco was acquired on February 13, 2004.

(3)	Other consists of corporate administrative expenses, net unrealized foreign exchange gains and losses on U.S. denominated investments, interest income and interest expense. Other assets are principally cash and cash equivalents, investments, corporate office and related equipment.

Bandag, Incorporated
Notes to Consolidated Financial Statements

	Consolidated
In thousands	2006			2005			2004
Sales by product
Retread products	$	603,932		$	610,302		$	545,908
New tires		128,138			99,065			110,234
Retread tires		35,306			31,258			44,985
Equipment		27,197			25,709			27,551
Services		129,544			102,444			83,312
Other		49,453			45,862			52,353

Net sales to unaffiliated customers	$	973,570		$	914,640		$	864,343

Transfers	$	40,783		$	37,814		$	47,842
Gross profit	$	311,915		$	316,207		$	320,387
Depreciation expense		26,877			26,302			27,182
Restructuring expense		19,762			3,100			--
Corporate expense		13,693			15,745			14,069
Operating earnings	$	49,851		$	67,215		$	82,009
Interest revenue		7,971			8,090			4,883
Interest expense		(1,433	)		(1,951	)		(1,990	)

Earnings before income taxes,
minority interest and
discontinued operations	$	56,389		$	73,354		$	84,902
Total assets at December 31	$	752,948		$	755,037		$	730,727
Expenditures for long-lived assets		77,444			65,647			45,150
Additions to (deductions from) long-
lived assets due to acquisitions
(divestitures)		112			420			44,215
Fixed assets		253,996			209,640			170,018
Goodwill and intangible assets		40,099			32,949			32,454
Retained earnings		515,883			529,372			513,152

Bandag, Incorporated
Notes to Consolidated Financial Statements

The following tables present information concerning net sales and long-lived assets for countries which exceed 10% of the respective totals:

In thousands	Year Ended December 31
Net Sales⁽¹⁾	2006		2005		2004
United States	$	716,984	$	643,525	$	567,630
Other		256,586		271,115		296,713

Total	$	973,570	$	914,640	$	864,343

	December 31
Long-Lived Assets⁽²⁾	2006		2005		2004
United States	$	266,964	$	213,379	$	170,826
Other		27,131		29,210		31,646

Total	$	294,095	$	242,589	$	202,472

(1)	Net sales are attributed to countries based on the location of customers.

(2)	Corporate long-lived assets are included in the United States.

Note 14. Shareholders’ Equity

As of December 31, 2006, the Company had three classes of capital stock outstanding. These classes were Common Stock, Class A Common Stock and Class B Common Stock. On January 16, 2007, each share of Class B Common Stock was automatically converted into one share of Common Stock. Class A Common Stock has the same rights regarding dividends and distributions upon liquidation, merger and consolidation as Common Stock. However, Class A Common Shareholders are not entitled to vote, while Common Shareholders are entitled to one vote for each share held.

On August 21, 2006, Bandag entered into a shareholder rights agreement. In general, the rights agreement imposes significant adverse consequences upon any person or group that acquires 20% or more of the outstanding Common Stock, 20% or more of the outstanding Class A Common Stock or 20% or more of the outstanding Common Stock and Class A Common Stock on a combined basis without the approval of the Bandag board of directors. On December 5, 2006, immediately prior to the execution of the merger agreement with BSAH, Bandag, entered into an amendment to the rights agreement which provides that neither the execution of the merger agreement nor the completion of the merger will trigger the provisions of the rights agreement. The rights agreement, as amended, also provides that the potential exercisability of the rights will terminate immediately prior to the effective time of the merger, but only if such effective time occurs. Except as provided in the amendment, the rights agreement remains in effect.

In 1999, the Company’s Board of Directors adopted the Bandag, Incorporated Stock Award Plan (the Plan). Under the terms of the Plan, the Company was authorized, through February 18, 2005 to award up to 2,400,000 shares of Class A Common Stock to certain eligible employees and directors incentive stock options, nonqualified stock options, and restricted stock. The exercise price of each option is equal to the market price of the Company’s stock on the date of the grant. The maximum term of the options is 10 years and the maximum vesting period is 5 years. Restricted stock granted under the Plan vests over a three year period. The Company records expense related to the Plan on a straight-line basis over the period the grants vest. During the years ended December 31, 2005 and 2004, 23,253 and 47,378 restricted shares of Class A Common Stock were granted under the Plan and $1,111,000 and $975,000 of expense was recorded, respectively. During 2006, $643,000 of restricted stock expense was recorded for restricted stock granted in previous years under the Plan. Also during 2004, 152,510 options were granted and $2,641,000 of expense was recorded. During 2006 and 2005, $879,000 and $2,313,000 of option expense was recorded for options issued in previous years under the Plan, respectively. No further grants of options or restricted stock shall be made under the Plan. For further information see “Accounting for Stock-Based Compensation” under Note 1.

Bandag, Incorporated
Notes to Consolidated Financial Statements

In 2004, the Company’s Board of Directors adopted the Bandag, Incorporated 2004 Stock Grant and Awards Plan (the 2004 Plan). Under the terms of the 2004 Plan, the Company may award to certain eligible employees and directors stock options, stock appreciation rights, performance shares, performance units, restricted stock, restricted stock units, dividend equivalent units and incentive awards, whether granted alone or in addition to, in tandem with, or in substitution for any other award. Up to 2,000,000 shares of Class A Common Stock is authorized for issuance under the 2004 Plan and as of December 31, 2006, 1,790,373 shares were available for issuance under the 2004 Plan. During the years ended December 31, 2006 and 2005, 8,290 and 41,156 restricted shares of Class A Common Stock were granted under the 2004 Plan and $557,000 and $496,000 of expense was recorded, respectively. Also during 2006 and 2005, 62,160 and 102,320 options were granted and $387,000 and $354,000 of expense was recorded, respectively. During the year ended December 31, 2005, 6,400 stock appreciation rights and 3,320 restricted stock units were granted under the Plan and $78,000 of expense was recorded. During the year ended December 31, 2004, 6,200 stock appreciation rights and 1,915 restricted stock units were granted under the 2004 Plan and $36,000 of expense was recorded. During 2006 $22,000 of expense was recorded for stock appreciation rights and restricted stock units granted in previous years under the 2004 Plan.

Note 15. Retirement Benefit Plans

The Company sponsors defined-benefit pension plans covering full-time employees directly employed by Bandag, Incorporated, Bandag Canada Ltd. and certain employees of TDS and in the Company’s European operations. Effective December 31, 2006 the pension plans were frozen for U.S. salaried and hourly employees and for salaried Canadian employees. In addition to providing pension benefits, the Company provides certain postretirement medical benefits to certain individuals who retired from employment before January 1, 1993. Employees who retire after December 31, 1992 and are at least age 62 with 15 years of service of direct employment with Bandag, Incorporated or Kendon Corporation are eligible for temporary medical benefits that cease at age 65. The Company uses a September 30 measurement date for the majority of its plans.

Bandag, Incorporated
Notes to Consolidated Financial Statements

The reconciliations of the benefit obligations, the reconciliations of the fair value of plan assets, and the reconciliations of funded status of the plans, as determined by consulting actuaries, are as follows:

	Pension Benefits						Postretirement Benefits
In thousands	2006			2005			2006			2005
Change in benefit obligations:
Benefit obligations at beginning of year	$	149,145		$	130,013		$	6,083		$	7,436
Service cost		4,811			4,765			202			255
Interest cost		7,645			7,251			334			377
Participants' contributions		44			50			--			--
Plan amendments		--			(32	)		--			--
Exchange rate changes		(1	)		275			--			--
Benefits paid		(4,966	)		(4,459	)		(245	)		(365	)
Curtailment gain		(33,200	)		--			(500	)		--
Settlement gain		(784	)		--			--			--
Special termination benefits		6,000			--			1,900			--
Actuarial (gain) or loss		(4,989	)		11,282			(1,066	)		(1,620	)

Benefit obligations at end of year	$	123,705		$	149,145		$	6,708		$	6,083

Change in plan assets at fair value:
Fair value of plan assets at
beginning of year	$	127,412		$	115,068		$	--		$	--
Actual return on plan assets		5,892			15,716			--			--
Employer contributions		371			814			245			365
Participants' contributions		44			50			--			--
Benefits paid		(4,966	)		(4,459	)		(245	)		(365	)
Settlement payments		(1,025	)		--			--			--
Exchange rate changes		4			223			--			--

Fair value of plan assets at end of year	$	127,732		$	127,412		$	--		$	--

	Pension Benefits						Postretirement Benefits
In thousands	2006			2005			2006			2005
Reconciliation of funded status:
Funded status	$	4,027		$	(21,733	)	$	(6,708	)	$	(6,083	)
Unrecognized actuarial (gain) or loss		260			38,200			(3,601	)		(2,660	)
Unrecognized transition asset		166			385			--			--
Unrecognized prior service cost		(183	)		1,033			25			29
Employer contributions after
measurement date		202			--			--			--

Net amount recognized	$	4,472		$	17,885		$	(10,284	)	$	(8,714	)

Bandag, Incorporated
Notes to Consolidated Financial Statements

Amounts recognized in the consolidated balance sheet as of December 31, 2006 consist of:


In thousands	Pension Benefits 2006			Postretirement Benefits 2006
Non-current asset	$	12,596		$	--
Accrued liability - current		(2,608	)		(624	)
Accrued liability - non-current		(5,372	)		(6,084	)

Net amount recognized	$	4,616		$	(6,708	)

Amounts recognized in accumulated other comprehensive loss (pre-tax) as of December 31, 2006 consist of:

In thousands	Pension Benefits 2006			Postretirement Benefits 2006
Transitional asset	$	(166	)	$	--
Prior service credit		570			(25	)
Accumulated (loss) or gain		(260	)		3,601

Net amount recognized	$	144		$	3,576

Amounts recognized in the consolidated balance sheet as of December 31, 2005 consist of:

In thousands	Pension Benefits 2005			Postretirement Benefits 2005
Non-current asset	$	16,053		$	--
Accrued liability - current		(762	)		(8,714	)
Accrued liability - non-current		593			--
Accumulated other comprehensive loss		2,001			--

Net amount recognized	$	17,885		$	(8,714	)

The estimated costs that will be amortized from accumulated other comprehensive loss into net periodic cost during fiscal year 2007 are as follows:

In thousands	Pension Benefits		Postretirement Benefits
Transitional asset	$	17	$	4
Prior service credit		27		--
Accumulated (gain) loss		123		(163	)

Net amount recognized	$	167	$	(159	)

Bandag, Incorporated
Notes to Consolidated Financial Statements

The incremental effect of applying SFAS 158 on the consolidated balance sheet at December 31, 2006 was as follows:

In thousands	Pension Benefits 2006			Postretirement Benefits 2006
Non-current asset	$	6,609		$	--
Accrued liability - current		623			(624	)
Accrued liability - non-current		(5,372	)		4,200
Accumulated other comprehensive loss		(1,860	)		(3,576	)

The accumulated benefit obligation for the U.S. defined benefit pension plan was $117,551,000 and $108,006,000 at December 31, 2006 and 2005, respectively.

Information for plans with an accumulated benefit obligation in excess of plan assets:

	Pension Benefits				Postretirement Benefits
In thousands	2006		2005		2006		2005
Projected benefit obligation	$	11,624	$	13,291		--		--
Accumulated benefit obligation		10,898		11,188	$	6,708	$	6,083
Fair value of plan assets		5,523		6,310		--		--

Net periodic cost is composed of the following:

	Pension Benefits									Postretirement Benefits
In thousands	2006			2005			2004			2006			2005			2004
Components of net periodic (benefit) cost
Service cost	$	4,811		$	4,765		$	4,264		$	202		$	255		$	226
Interest cost		7,645			7,251			6,782			334			377			393
Expected return on plan assets		(8,394	)		(7,810	)		(7,196	)		--			--			--
Amortization of prior service cost		318			150			129			4			4			4
Amortization of transitional assets		46			(227	)		(647	)		--			--			--
Recognized actuarial (gain) loss		1,593			1,137			1,172			(124	)		(62	)		(53	)

Net periodic cost	$	6,019		$	5,266		$	4,504		$	416		$	574		$	570

Additional (gain) or loss recognized due to:
Curtailment	$	(2,800	)		--			--		$	(500	)		--			--
Settlement		314			--			--			--			--			--
Special termination benefits		6,000			--			--			1,900			--			--

Bandag, Incorporated
Notes to Consolidated Financial Statements

Additional information:

	Pension Benefits									Postretirement Benefits
	2006			2005			2004			2006			2005			2004
Weighted-average assumptions used
to determine net periodic benefit cost
at October 1
Discount rate		5.5	%		5.8	%		6.0	%		5.5	%		5.8	%		6.0	%
Rate of increase in future
Compensation		4.6	%		4.5	%		4.5	%		N/A			N/A			N/A
Expected long-term rate of return
on assets		7.0	%		7.0	%		7.0	%		N/A			N/A			N/A
Weighted-average assumptions used
to determine benefit obligation
at September 30
Discount rate		5.8	%		5.5	%		5.8	%		5.8	%		5.5	%		5.8	%
Rate of increase in future
Compensation		N/A			4.6	%		4.5	%		N/A			N/A			N/A
Medical trend on pre-Medicare
charges as of September 30
Initial trend		N/A			N/A			N/A			9.0	%		9.5	%		9.5	%
Ultimate trend		N/A			N/A			N/A			*5.0	%		*5.0	%		*5.0	%
Medical trend on post-Medicare
charges as of September 30
Initial trend		N/A			N/A			N/A			11.0	%		11.5	%		11.5	%
Ultimate trend		N/A			N/A			N/A			**5.5	%		**5.5	%		**5.5	%

*Ultimate trend rate reached in 2009.

**Ultimate trend rate reached in 2011.

The expected long-term rate of return on plan assets is based on the aggregate historical returns of the investments that comprise the defined benefit plan portfolio.

Assets of the plans are principally invested in U.S. domestic common stocks, and short term notes and bonds (fixed income securities) with maturities under five years.

A one-percentage-point change in the assumed health care cost trend rates would have the following effects:

In thousands	1-Percentage- Point Increase		1-Percentage- Point Decrease
Effect on total of service and interest cost components	$	68	$	(57	)
Effect on postretirement benefit obligation	$	720	$	(630	)

Bandag, Incorporated
Notes to Consolidated Financial Statements

The Company’s weighted-average asset allocations at September 30, by asset category are as follows:

	Pension Benefits
	Target			2006			2005			2004
Debt securities		100.0	%		100.0	%		17.5	%		15.9	%
Equity securities		--			--			82.3			83.5
Other		--			--			0.2			0.6

Total		100.0	%		100.0	%		100.0	%		100.0	%

The Company expects to fund pension plans approximately $554,000 in 2007. The Company expects to fund its postretirement plan approximately $624,000 in 2007. The need for further contributions will be based on changes in the value of plan assets and the movements of interest rates during each year. The investment strategy is to obtain an average 5.5% annual return for the long-term. Each year, the Company periodically reviews with its actuaries its investment strategy and funding needs.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

	Pension Benefits		Postretirement Benefits
In thousands
2007	$	11,513	$	624
2008		5,653		642
2009		5,696		637
2010		5,780		636
2011		5,926		643
2012-2016		33,847		3,268

The Company also sponsors defined-contribution plans, covering substantially all employees in the United States. Annual contributions are made in such amounts as determined by the Company’s Board of Directors and include a potential Company contribution of stock based on earnings per share. Although employees may contribute up to 75% of their annual compensation from the Company, they are generally not required to make contributions in order to participate in the plans. The Company currently provides plans with a variety of contribution levels (including employee contribution match provisions). The Company recorded expense for contributions in the amount of $3,943,000, $5,003,000 and $3,960,000 in 2006, 2005, and 2004, respectively. During the years ended December 31, 2006, 2005 and 2004, the Company issued 4,312, 18,521 and 21,319 shares of Common Stock, respectively. During the years ended December 31, 2006, 2005, and 2004, the Company issued 4,312, 20,034 and 21,773 shares of Class A Common Stock, respectively. The Common Stock and Class A Common Stock were all accrued for in the previous years. The Company recorded expense under the plan of $1,200,000 for the year ended December 31, 2004.

Employees in most foreign countries are covered by various retirement benefit arrangements generally sponsored by the foreign governments. The Company’s contributions to foreign plans were not significant in 2006, 2005, and 2004.

Bandag, Incorporated
Notes to Consolidated Financial Statements

Note 16. Litigation

Certain litigation arising in the normal course of business is pending. The Company is of the opinion that the resolution of such litigation will not have a significant effect on the consolidated financial statements.

Plumbers &Pipefitters Local 572 Pension Fund v. Bandag, et al.

On December 8, 2006, a purported class action shareholder complaint was filed in the Muscatine County District Court in the State of Iowa (the complaint) by Plumbers and Pipefitters Local 572 Pension Fund, seeking to pursue a class action on behalf of all of the Bandag shareholders. The complaint names Bandag, Martin G. Carver, the Chairman, President and Chief Executive Officer, and other directors, Gary E. Dewel, R. Stephen Newman, Roy J. Carver, Jr., James R. Everline, Phillip J. Hanrahan and Amy P. Hutton, as defendants. The complaint alleges, among other things, that, in connection with the proposed business combination transaction with Bridgestone Americas Holding, Inc., the directors breached their fiduciary duties of due care and good faith by failing to solicit bids from other potential bidders and failing to maximize shareholder value and by creating deterrents to third party offers. Among other things, the complaint seeks class action status, and a court order enjoining the consummation of the merger and directing the defendants to take appropriate steps to maximize shareholder value. While the lawsuit is in its preliminary stage, Bandag believes that the claims in the lawsuit are without merit and intends to vigorously defend it.

Audra Smith v. Michael Rouse, et al. and Yolanda Jackson v. Michael Rouse, et al.

Bandag has reached an agreement to settle with all known claimants, including those inSmithandJackson, in consideration of the payment of a nominal amount. The parties are in the process of securing the courts’ approval of the settlement.

Bandag, Incorporated
Notes to Consolidated Financial Statements

Note 17. Summary of Unaudited Quarterly Results of Operations

Unaudited quarterly results of operations for the years ended December 31, 2006 and 2005 are summarized as follows (in thousands except per share data):

	Quarter Ended 2006
	Mar. 31			Jun. 30		Sep. 30		Dec. 31
Net sales	$	212,355		$	247,315	$	260,166	$	253,734
Gross profit		67,611			77,932		84,292		82,080
Earnings from continuing operations		5,709			10,479		9,198		11,170
Net earnings (loss)		(10,647	)		10,479		9,198		10,922
Basic earnings (loss) per share
Earnings from continuing operations	$	0.30		$	0.54	$	0.48	$	0.58
Net loss on discontinued operations		(0.85	)		--		--		(0.01	)

Net earnings (loss)	$	(0.55	)	$	0.54	$	0.48	$	0.57
Diluted earnings (loss) per share
Earnings from continuing operations	$	0.29		$	0.54	$	0.47	$	0.57
Net loss on discontinued operations		(0.83	)		--		--		(0.01	)

Net earnings (loss)	$	(0.54	)	$	0.54	$	0.47	$	0.56

	Quarter Ended 2005
	Mar. 31		Jun. 30		Sep. 30		Dec. 31
Net sales	$	189,756	$	227,261	$	245,345	$	252,278
Gross profit		64,010		79,703		89,603		82,891
Net earnings		5,962		12,739		18,724		12,054
Net earnings per share:
Basic	$	0.31	$	0.66	$	0.96	$	0.62
Diluted	$	0.30	$	0.65	$	0.95	$	0.62

Third quarter 2006 net earnings reflect $9,318 after-tax, or $0.48 per diluted share, related to restructuring charges.

Fourth quarter 2006 net earnings reflect $3,850 after-tax, or $0.20 per diluted share, related to restructuring charges.

Fourth quarter 2005 net earnings reflect $2,680 after-tax, or $0.14 per diluted share, related to restructuring charges.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

Item 9A. CONTROLS AND PROCEDURES

Based on an evaluation performed by the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2006.

Based on an evaluation performed by the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, there were no changes in the Company’s internal control over financial reporting identified in such evaluation that occurred during the quarter ended December 31, 2006 that has materially affected, or is likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. OTHER INFORMATION

None

PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information concerning the directors of the registrant called for by Items 401 and 405 of Regulation S-K is incorporated herein by reference from the registrant’s definitive Proxy Statement for the 2007 Annual Meeting of Shareholders (referred to as the Proxy Statement) under the headings “Election of Directors” and “Miscellaneous – Section 16(a) Beneficial Reporting Compliance,” unless the Proxy Statement will not be filed by April 30, in which case Bandag will amend this Form 10-K to provide the omitted information in accordance with the requirements of Instruction G to Form 10-K. In accordance with General Instruction G to Form 10-K, the information with respect to executive officers of the Company required by Item 401 of Regulation S-K has been included in Part I hereof.

The information concerning the audit committee financial expert, the identification of the audit committee members and communications, with the Board required pursuant to Items 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is incorporated herein by reference from the Proxy Statement under the heading “The Board of Directors and Its Committees,” unless the Proxy Statement will not be filed by April 30, in which case Bandag will amend this Form 10-K to provide the omitted information in accordance with the requirements of Instruction G to Form 10-K.

The information concerning the Company’s code of ethics required by Item 406 of Regulation S-K has been included in Part I hereof under the heading “Available Information.”

Item 11. EXECUTIVE COMPENSATION

The information called for by Item 11 is incorporated herein by reference from the Proxy Statement under the heading “Remuneration of Executive Officers and Directors,” unless the Proxy Statement will not be filed by April 30, in which case Bandag will amend this Form 10-K to provide the omitted information in accordance with the requirements of Instruction G to Form 10-K. The subsection entitled “Report of Management Continuity and Compensation Committee on Executive Compensation” is not deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent as specifically incorporated by reference into such filing.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information called for by Item 201(d) of Regulation S-K is incorporated herein by reference from the Proxy Statement under the heading “Remuneration of Executive Officers and Directors,” unless the Proxy Statement will not be filed by April 30, in which case Bandag will amend this Form 10-K to provide the omitted information in accordance with the requirements of Instruction G to Form 10-K. The information called for by Item 403 of Regulation S-K is incorporated herein by reference from the Proxy Statement under the heading “Security Ownership,” unless the Proxy Statement will not be filed by April 30, in which case Bandag will amend this Form 10-K to provide the omitted information in accordance with the requirements of Instruction G to Form 10-K.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information called for by Item 13 is incorporated herein by reference from the Proxy Statement under the heading “Remuneration of Officers and Directors – Transactions with Management/Principal Shareholders and Directors” and the heading “The Board of Directors and its Committees – Independence,” unless the Proxy Statement will not be filed by April 30, in which case Bandag will amend this Form 10-K to provide the omitted information in accordance with the requirements of Instruction G to Form 10-K.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information called for by Item 14 is incorporated herein by reference from the Proxy Statement under the heading “Proposal No. 3 – Ratification of Selection of Independent Auditors,” unless the Proxy Statement will not be filed by April 30, in which case Bandag will amend this Form 10-K to provide the omitted information in accordance with the requirements of Instruction G to Form 10-K.

PART IV

Item 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES

(1)	Financial Statements

The following consolidated financial statements are included in Part II, Item 8:

		Page
	Report of Management	31
	Report of Independent Registered Public Accounting Firm - Internal Control Over Financial Reporting	32
	Report of Independent Registered Public Accounting Firm - Consolidated Financial Statements	33
	Consolidated Balance Sheets as of December 31, 2006 and 2005	34
	Consolidated Statements of Earnings for the Years Ended December 31, 2006,
	2005 and 2004	36
	Consolidated Statements of Cash Flows for the Years Ended December 31, 2006,
	2005 and 2004	37
	Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
	December 31, 2006, 2005 and 2004	38
	Notes to Consolidated Financial Statements	41

(2)	Financial Statement Schedule

Schedule II - - Valuation and qualifying accounts and reserves.

All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.

(3)

Exhibits

Exhibit No.	Description
2.1	Agreement and Plan of Merger, dated as of December 5, 2006, by and among Bandag, Incorporated, Grip Acquisition
	Corporation and Bridgestone Americas Holding, Inc. (Incorporated by reference to the Company's Form 8-K dated
	as of December 5, 2006.)
3.1	Bylaws: As amended November 8, 2005. (Incorporated by reference to Exhibit No. 3.1 to the Company's Form 10-K
	for the year ended December 31, 2005.)
3.2	Restated Articles of Incorporation, effective December 30, 1986. (Incorporated by reference to Exhibit No. 3.2
	to the Company's Form 10-K for the year ended December 31, 1992.)
3.3	Articles of Amendment to Bandag, Incorporated's Articles of Incorporation, effective May 6, 1992.
	(Incorporated by reference to Exhibit No. 3.3 to the Company's Form 10-K for the year ended December 31, 1992.)
3.4	Articles of Amendment to Bandag, Incorporated's Restated Articles of Incorporation, effective May 15, 2002.
	(Incorporated by reference to Exhibit 3(i) to the Company's Form 10-Q for the quarter ended June 30, 2002.)
4.1	Instruments defining the rights of security holders. (Incorporated by reference to Exhibit Nos. 3.2 and 3.3 to
	the Company's Form 10-K for the year ended December 31, 1992.)


4.2	Note Purchase Agreement dated December 15, 1997 for $40,000,000 of 6.50% Senior Notes due December 15, 2007.
	(Incorporated by reference to Exhibit 4.3 to the Company's Form 10-K for the year ended December 31, 1997.)
4.3	Rights Agreement dated as of August 21, 2006, between Bandag, Incorporated and Computershare Trust Company,
	N.A. (Incorporated by reference to the Company's Form 8-A dated as of August 22, 2006.)
4.4	Amendment to Rights Agreement, dated as of December 5, 2006, between Bandag, Incorporated and Computershare
	Trust Company, N.A. (Incorporated by reference to the Company's Form 8-A/A dated as of December 6, 2006.)
10.1	Bandag, Incorporated Restricted Stock Grant Plan, as amended August 24, 1999. (Incorporated by reference to
	Exhibit No. 10.1 to the Company's Form 10-K for the year ended December 31, 1999.)
10.2	U.S. Bandag System Franchise Agreement Truck and Bus Tires. (Incorporated by reference to Exhibit No. 10.2 to
	the Company's Form 10-K for the year ended December 31, 1993.)
10.2	U.S. Bandag System Franchise Agreement Truck and Bus Tires, as revised April 1996. (Incorporated by reference
	to Exhibit No. 10.2(a) to the Company's Form 10-K for the year ended December 31, 1996.)
10.2	Bandag System Franchise Agreement, as revised November 1998. (Incorporated by reference to Exhibit 10.2(a) to
	the Company's form 10-K for the year ended December 31, 1998.)
10.2	Form of Bandag Dealer Franchise Agreement. (Incorporated by reference to Exhibit 10.2(c) to the Company's Form
	10-K for the year ended December 31, 2001.)
10.2	Form letter to the Company's U.S. franchisees. (Incorporated by reference to Exhibit 99.1 to the Company's
	Form 8-K dated June 14, 2002.)
10.2	Current Form of Bandag Dealer Franchise Agreement. (Incorporated by reference to Exhibit 10.2(e) to the
	Company's Form 10-K for the year ended December 31, 2004.)
10.3	Miscellaneous Fringe Benefits for Executives. (Incorporated by reference to Exhibit No. 10.3 to the Company's
	Form 10-K for the year ended December 31, 2001.)
10.4	Form of Participation Agreement under the Bandag, Incorporated Restricted Stock Grant Plan. (Incorporated by
	reference as Exhibit 10.7 to the Company's Form 10-K for the year ended December 31, 1994.)
10.5	Severance Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated and Martin G. Carver.
	(Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q/A for the quarter ended June 30, 1999.)
10.6	Severance Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated and Nathaniel L. Derby, II.
	(Incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q/A for the quarter ended June 30, 1999.)
10.7	Severance Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated and Warren W. Heidbreder.
	(Incorporated by reference to Exhibit 10.4 to the Company's Form 10-Q/A for the quarter ended June 30, 1999.)
10.8	Severance Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated and John C. McErlane.
	(Incorporated by reference to Exhibit 10.5 to the Company's Form 10-Q/A for the quarter ended June 30, 1999.)
10.9	Bandag, Incorporated Stock Award Plan, as amended March 12, 2002. (Incorporated by reference to Exhibit 10.9 to
	the Company's Form 10-K for the year ended December 31, 2001.)
10.10	Form of Nonqualified Stock Option Agreement under the Bandag, Incorporated Stock Award Plan. (Incorporated by
	reference to Exhibit 10.15 to the Company's Form 10-K for the fiscal year ended December 31, 2000.)
10.11	Form of Restricted Stock Award Agreement under the Bandag, Incorporated Stock Award Plan. (Incorporated by
	reference to Exhibit 10.11 to the Company's Form 10-K for the year ended December 31, 2001.)
10.12	Description of Short-term Compensation Plan. (Incorporated by reference to Exhibit No. 10.12 to the Company's
	Form 10-K for the year ended December 31, 2005.)
10.13	Bandag, Incorporated 2004 Stock Grant and Awards Plan. (Incorporated by reference to Appendix A to the
	Company's definitive proxy statement for its 2004 annual meeting of shareholders filed on March 31, 2004.)


10.14	Form of Stock Appreciation Rights Agreement under the Bandag, Incorporated 2004 Stock Grant and Awards Plan.
	(Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8, Registration No.
	333-115369, filed on May 11, 2004.)
10.15	Form of Restricted Stock Unit Agreement under the Bandag, Incorporated 2004 Stock Grant and Awards Plan.
	(Incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8, Registration No.
	333-115369, filed on May 11, 2004.)
10.16	Form of Restricted Stock Award Agreement under the Bandag, Incorporated 2004 Stock Grant and Awards Plan.
	(Incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed on February 25,
	2005.)
10.17	Form of Nonqualified Stock Option Award Agreement under the Bandag, Incorporated 2004 Stock Grant and Awards
	Plan. (Incorporated by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K filed on March
	17, 2005.)
10.18	Form of Restricted Stock Award Agreement for Non-Employee Directors. (Incorporated by reference to Exhibit
	99.1 to the Company's Current Report on Form 8-K filed on March 17, 2005.)
10.19	Form of Nonqualified Stock Option Award Agreement for Non-Employee Directors. (Incorporated by reference to
	Exhibit 99.2 to the Company's Current Report on Form 8-K filed on March 17, 2005.)
10.20	Voting Agreement, dated as of December 5, 2006, by and between Martin G. Carver and Grip Acquisition
	Corporation. (Incorporated by reference to the Company's Form 8-K dated as of December 5, 2006.)
10.21	Voting Agreement, dated as of December 5, 2006, by and between Roy J. Carver and Grip Acquisition Corporation.
	(Incorporated by reference to the Company's Form 8-K dated as of December 5, 2006.)
10.22	Voting Agreement, dated as of December 5, 2006, by and between Carver Partners LP and Grip Acquisition
	Corporation. (Incorporated by reference to the Company's Form 8-K dated as of December 5, 2006.)
10.23	Consulting Agreement, dated as of the effective date of the merger, by and between Martin G. Carver and Bandag,
	Incorporated. (Incorporated by reference to the Company's Form 8-K dated as of December 5, 2006.)
10.24	Consulting Agreement, dated as of the effective date of the merger, by and between Warren W. Heidbreder and
	Bandag, Incorporated. (Incorporated by reference to the Company's Form 8-K dated as of December 5, 2006.)
10.25	Severance Agreement, dated as of December 14, 2006, by and between Frederico U. Kopittke and Bandag,
	Incorporated. (Incorporated by reference to the Company's Form 8-K dated as of December 14, 2006.)
10.26	Form of Severance Agreement. (Incorporated by reference to the Company's Form 8-K dated as of December 14,
	2006.)
21	Subsidiaries of Registrant.
23	Consent of Independent Auditors.
31.1	Certification of the Chief Executive Officer.
31.2	Certification of the Chief Financial Officer.
32.1	Written Statement of the Chairman of the Board, Chief Executive Officer and President of Bandag, Incorporated
	Pursuant to 18 U.S.C.ss.1350.
32.2	Written Statement of the Vice President, Chief Financial Officer and Secretary of Bandag, Incorporated Pursuant
	to 18 U.S.C.ss.1350.

*Represents a management compensatory plan or arrangement.

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

BANDAG, INCORPORATED AND SUBSIDIARIES

COL. A	COL. B		ADDITIONS COL. C		DEDUCTIONS COL. D					COL. E
DESCRIPTION	Balance at Beginning of Period		Charged to Costs and Expenses		(1) Uncollectible Accounts Written-Off		Foreign Exchange Fluctuations			Balance at End of Period
Year ended December 31, 2006:	$	13,782,000	$	1,075,000	$	2,579,000	$	701,000		$	12,979,000
Allowance for doubtful accounts
Year ended December 31, 2005:
Allowance for doubtful accounts	$	14,734,000	$	1,816,000	$	2,007,000	$	(761,000	)	$	13,782,000
Year ended December 31, 2004:
Allowance for doubtful accounts	$	16,350,000	$	788,000	$	3,324,000	$	(920,000	)	$	14,734,000

(1) Uncollectible accounts written off, net of recoveries.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	BANDAG, INCORPORATED
	By/s/ Martin G. Carver
	Martin G. Carver
	Chairman of the Board,
	Chief Executive Officer and President
	(Principal Executive Officer)

Date: March 15, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


/s/ Roy J. Carver, Jr.	/s/ Gary E. Dewel
Roy J. Carver, Jr	Gary E. Dewel
Director	Director
/s/ James R. Everline	/s/ Phillip J. Hanrahan
James R. Everline	Phillip J. Hanrahan
Director	Director
/s/ Amy P. Hutton	/s/ R. Stephen Newman
Amy P. Hutton	R. Stephen Newman
Director	Director
/s/ Martin G. Carver	/s/ Warren W. Heidbreder
Martin G. Carver	Warren W. Heidbreder
Chairman of the Board,	Vice President, Chief Financial
Chief Executive Officer and President	Officer (Principal Financial Officer)
(Principal Executive Officer)
	/s/ Jeffrey C. Pattison
	Jeffrey C. Pattison
	Corporate Controller
	(Principal Accounting Officer)

Date: March 15, 2007

EXHIBIT INDEX

	Exhibit No.	Description
	2.1	Agreement and Plan of Merger, dated as of December 5, 2006, by and among Bandag,
		Incorporated, Grip Acquisition Corporation and Bridgestone Americas Holding, Inc.
		(Incorporated by reference to the Company’s Form 8-K dated as of December 5, 2006.)
	3.1	Bylaws: As amended November 8, 2005. (Incorporated by reference to Exhibit No.
		3.1 to the Company’s Form 10-K for the year ended December 31, 2005.)
	3.2	Restated Articles of Incorporation, effective December 30, 1986. (Incorporated by
		reference to Exhibit No. 3.2 to the Company’s Form 10-K for the year ended December 31, 1992.)
	3.3	Articles of Amendment to Bandag, Incorporated’s Articles of Incorporation,
		effective May 6, 1992. (Incorporated by reference to Exhibit No. 3.3 to the
		Company’s Form 10-K for the year ended December 31, 1992.)
	3.4	Articles of Amendment to Bandag, Incorporated’s Restated Articles of
		Incorporation, effective May 15, 2002. (Incorporated by reference to Exhibit 3(i)
		to the Company’s Form 10-Q for the quarter ended June 30, 2002.)
	4.1	Instruments defining the rights of security holders. (Incorporated by reference
		to Exhibit Nos. 3.2 and 3.3 to the Company’s Form 10-K for the year ended December
		31, 1992.)
	4.2	Note Purchase Agreement dated December 15, 1997 for $40,000,000 of 6.50% Senior
		Notes due December 15, 2007. (Incorporated by reference to Exhibit 4.3 to the
		Company’s Form 10-K for the year ended December 31, 1997.)
	4.3	Rights Agreement dated as of August 21, 2006, between Bandag, Incorporated and
		Computershare Trust Company, N.A. (Incorporated by reference to the Company’s
		Form 8-A dated as of August 22, 2006.)
	4.4	Amendment to Rights Agreement, dated as of December 5, 2006, between Bandag,
		Incorporated and Computershare Trust Company, N.A. (Incorporated by reference to
		the Company’s Form 8-A/A dated as of December 6, 2006.)
	10.1	Bandag, Incorporated Restricted Stock Grant Plan, as amended August 24, 1999.
		(Incorporated by reference to Exhibit No. 10.1 to the Company’s Form 10-K for the
		year ended December 31, 1999.)
	10.2	U.S. Bandag System Franchise Agreement Truck and Bus Tires. (Incorporated by
		reference to Exhibit No. 10.2 to the Company’s Form 10-K for the year ended
		December 31, 1993.)
	10.2	U.S. Bandag System Franchise Agreement Truck and Bus Tires, as revised April
		1996. (Incorporated by reference to Exhibit No. 10.2(a) to the Company’s Form
		10-K for the year ended December 31, 1996.)
	10.2	Bandag System Franchise Agreement, as revised November 1998. (Incorporated by
		reference to Exhibit 10.2(a) to the Company’s form 10-K for the year ended
		December 31, 1998.)
	10.2	Form of Bandag Dealer Franchise Agreement. (Incorporated by reference to Exhibit
		10.2(c) to the Company’s Form 10-K for the year ended December 31, 2001.)
	10.2	Form letter to the Company’s U.S. franchisees. (Incorporated by reference to
		Exhibit 99.1 to the Company’s Form 8-K dated June 14, 2002.)
	10.2	Current Form of Bandag Dealer Franchise Agreement. (Incorporated by reference to
		Exhibit 10.2(e) to the Company’s Form 10-K for the year ended December 31, 2004.)
	10.3	Miscellaneous Fringe Benefits for Executives. (Incorporated by reference to
		Exhibit No. 10.3 to the Company’s Form 10-K for the year ended December 31, 2001.)
	10.4	Form of Participation Agreement under the Bandag, Incorporated Restricted Stock
		Grant Plan. (Incorporated by reference as Exhibit 10.7 to the Company’s Form 10-K
		for the year ended December 31, 1994.)
	10.5	Severance Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated
		and Martin G. Carver. (Incorporated by reference to Exhibit 10.1 to the Company’s
		Form 10-Q/A for the quarter ended June 30, 1999.)
	10.6	Severance Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated
		and Nathaniel L. Derby, II. (Incorporated by reference to Exhibit 10.2 to the
		Company’s Form 10-Q/A for the quarter ended June 30, 1999.)


	10.7	Severance Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated
		and Warren W. Heidbreder. (Incorporated by reference to Exhibit 10.4 to the
		Company’s Form 10-Q/A for the quarter ended June 30, 1999.)
	10.8	Severance Agreement, dated as of May 4, 1999, by and between Bandag, Incorporated
		and John C. McErlane. (Incorporated by reference to Exhibit 10.5 to the Company’s
		Form 10-Q/A for the quarter ended June 30, 1999.)
	10.9	Bandag, Incorporated Stock Award Plan, as amended March 12, 2002. (Incorporated by
		reference to Exhibit 10.9 to the Company’s Form 10-K for the year ended December 31, 2001.)
	10.10	Form of Nonqualified Stock Option Agreement under the Bandag, Incorporated Stock
		Award Plan. (Incorporated by reference to Exhibit 10.15 to the Company’s Form
		10-K for the fiscal year ended December 31, 2000.)
	10.11	Form of Restricted Stock Award Agreement under the Bandag, Incorporated Stock
		Award Plan. (Incorporated by reference to Exhibit 10.11 to the Company’s Form
		10-K for the year ended December 31, 2001.)
	10.12	Description of Short-term Compensation Plan. (Incorporated by reference to
		Exhibit No. 10.12 to the Company’s Form 10-K for the year ended December 31, 2005.)
	10.13	Bandag, Incorporated 2004 Stock Grant and Awards Plan. (Incorporated by reference
		to Appendix A to the Company’s definitive proxy statement for its 2004 annual
		meeting of shareholders filed on March 31, 2004.)
	10.14	Form of Stock Appreciation Rights Agreement under the Bandag, Incorporated 2004
		Stock Grant and Awards Plan. (Incorporated by reference to Exhibit 4.2 to the
		Company’s Registration Statement on Form S-8, Registration No. 333-115369, filed
		on May 11, 2004.)
	10.15	Form of Restricted Stock Unit Agreement under the Bandag, Incorporated 2004 Stock
		Grant and Awards Plan. (Incorporated by reference to Exhibit 4.3 to the Company’s
		Registration Statement on Form S-8, Registration No. 333-115369, filed on May 11,
		2004.)
	10.16	Form of Restricted Stock Award Agreement under the Bandag, Incorporated 2004 Stock
		Grant and Awards Plan. (Incorporated by reference to Exhibit 99.1 to the
		Company’s Current Report on Form 8-K filed on February 25, 2005.)
	10.17	Form of Nonqualified Stock Option Award Agreement under the Bandag, Incorporated
		2004 Stock Grant and Awards Plan. (Incorporated by reference to Exhibit 99.3 to
		the Company’s Current Report on Form 8-K filed on March 17,2005.)
	10.18	Form of Restricted Stock Award Agreement for Non-Employee Directors.
		(Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form
		8-K filed on March 17, 2005.)
	10.19	Form of Nonqualified Stock Option Award Agreement for Non-Employee Directors.
		(Incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form
		8-K filed on March 17, 2005.)
	10.20	Voting Agreement, dated as of December 5, 2006, by and between Martin G. Carver
		and Grip Acquisition Corporation. (Incorporated by reference to the Company’s
		Form 8-K dated as of December 5, 2006.)
	10.21	Voting Agreement, dated as of December 5, 2006, by and between Roy J. Carver and
		Grip Acquisition Corporation. (Incorporated by reference to the Company’s Form
		8-K dated as of December 5, 2006.)
	10.22	Voting Agreement, dated as of December 5, 2006, by and between Carver Partners LP
		and Grip Acquisition Corporation. (Incorporated by reference to the Company’s
		Form 8-K dated as of December 5, 2006.)
	10.23	Consulting Agreement, dated as of the effective date of the merger, by and between
		Martin G. Carver and Bandag, Incorporated. (Incorporated by reference to the
		Company’s Form 8-K dated as of December 5, 2006.)
	10.24	Consulting Agreement, dated as of the effective date of the merger, by and between
		Warren W. Heidbreder and Bandag, Incorporated. (Incorporated by reference to the
		Company’s Form 8-K dated as of December 5, 2006.)
	10.25	Severance Agreement, dated as of December 14, 2006, by and between Frederico U.
		Kopittke and Bandag, Incorporated. (Incorporated by reference to the Company’s
		Form 8-K dated as of December 14, 2006.)


	10.26	Form of Severance Agreement. (Incorporated by reference to the Company’s Form 8-K
		dated as of December 14, 2006.)
	21	Subsidiaries of Registrant.
	23	Consent of Independent Auditors.
	31.1	Certification of the Chief Executive Officer.
	31.2	Certification of the Chief Financial Officer.
	32.1	Written Statement of the Chairman of the Board, Chief Executive Officer and
		President of Bandag, Incorporated Pursuant to 18 U.S.C. §1350.
	32.2	Written Statement of the Vice President, Chief Financial Officer and Secretary of
		Bandag, Incorporated Pursuant to 18 U.S.C. §1350.

*Represents a management compensatory plan or arrangement.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	7th grade Avg

Bandag (BDG) Inactive 10-K2006 FY Annual report

Content analysis

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

Commission File Number 1-7007

Bandag, IncorporatedAnnual Report on Form 10-KYear Ended December 31, 2006Table of Contents

BANDAG, INCORPORATED

Item 1. BUSINESS

Introduction

Traditional Business

TDS

Vehicle Services

Regulations

Other Information

Operating Segment and Geographic Area Information

Executive Officers of the Registrant

Available Information

Item 1A. RISK FACTORS

Item 1B. UNRESOLVED STAFF COMMENTS

Item 2. PROPERTIES

Traditional Business

TDS

Vehicle Services

Item 3. LEGAL PROCEEDINGS

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Comparison of Five Year Cumulative Total Return

Item 6. SELECTED FINANCIAL DATA

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

OVERVIEW

RESULTS OF OPERATIONS

TRADITIONAL BUSINESS

TIRE DISTRIBUTION SYSTEMS, INC.

VEHICLE SERVICES

OTHER

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

RESULTS OF OPERATIONS

TRADITIONAL BUSINESS

TIRE DISTRIBUTION SYSTEMS, INC.

VEHICLE SERVICES

OTHER

IMPACT OF INFLATION AND CHANGING PRICES

FINANCIAL CONDITION

OFF BALANCE SHEET ARRANGEMENTS

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

CRITICAL ACCOUNTING POLICIES

NEW ACCOUNTING STANDARDS

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

Report of Management

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

Bandag, IncorporatedConsolidated Balance Sheets

Bandag, IncorporatedConsolidated Balance Sheets (continued)

Bandag, IncorporatedConsolidated Statements of Earnings

Bandag, IncorporatedConsolidated Statements of Cash Flows

Bandag, IncorporatedConsolidated Statements of Changes in Shareholders’ Equity

Bandag, IncorporatedConsolidated Statements of Changes in Shareholders’ Equity (continued)

Bandag, IncorporatedConsolidated Statements of Changes in Shareholders’ Equity (continued)

Bandag, IncorporatedNotes to Consolidated Financial Statements

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation:

Use of Estimates:

Cash Equivalents:

Accounts Receivable and Concentrations of Credit Risk:

Accounts Receivable and Allowance for Doubtful Accounts:

Deferred Taxes:

Inventories:

Bandag, IncorporatedNotes to Consolidated Financial Statements

Property, Plant, and Equipment:

Goodwill and Other Intangible Assets:

Foreign Currency Translation:

Long-Lived Assets:

Bandag, IncorporatedNotes to Consolidated Financial Statements

Research and Development:

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Bandag, Incorporated
Annual Report on Form 10-K
Year Ended December 31, 2006

Table of Contents

Bandag, Incorporated
Consolidated Balance Sheets

Bandag, Incorporated
Consolidated Balance Sheets (continued)

Bandag, Incorporated
Consolidated Statements of Earnings

Bandag, Incorporated
Consolidated Statements of Cash Flows

Bandag, Incorporated
Consolidated Statements of Changes in Shareholders’ Equity

Bandag, Incorporated
Consolidated Statements of Changes in Shareholders’ Equity (continued)

Bandag, Incorporated
Consolidated Statements of Changes in Shareholders’ Equity (continued)

Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
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Bandag, Incorporated
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Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
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Bandag, Incorporated
Notes to Consolidated Financial Statements

Bandag, Incorporated
Notes to Consolidated Financial Statements